Europe on alert as stagflation fears grow in wake of Ukraine invasion

The spectre of stagflation is hanging over Europe following Russia’s invasion of Ukraine as prices soar and economies slow, central bankers have warned.

Bank of England deputy governor Ben Broadbent said it was unlikely the UK ‘has ever experienced’ such a big hit to national income as he sounded the alarm over ‘even higher inflation’ alongside weaker growth.

And Christine Lagarde, president of the European Central Bank, added: ‘We will face, in the short term, higher inflation and slower growth. 

Crunch time: Bank of England deputy governor Ben Broadbent (pictured) said it was unlikely the UK ‘has ever experienced’ such a big hit to national income

The longer the war lasts, the higher the economic costs will be and the greater the likelihood we end up in more adverse scenarios.’

The comments came as the German government’s council of economic advisers cut its growth forecasts for 2022 in Europe’s largest economy from 4.6 per cent to just 1.8 per cent. 

Council member Volker Wieland said there was now a ‘substantial risk’ of recession.

At the same time, official figures showed inflation at 7.6 per cent in Germany in March – its highest for more than 40 years – and a 37-year-high of 9.8 per cent in Spain.

Jens-Oliver Niklasch at Landesbank Baden-Wuerttemberg said: ‘Welcome back to the 1970s – at least as far as food, goods and energy prices are concerned.’

Prices of commodities including oil, gas and wheat have soared as war in Ukraine and sanctions on Russia take their toll.

Lagarde sought to play down fears about stagflation in the eurozone.

She said that food and energy prices in the single currency bloc should stop rising and stabilise, though this would be at a higher rate. Stagflation, where an economy stagnates but inflation is rife, is seen as a disaster for governments and households.

It usually means that even though prices are rising, wages remain flat, forcing families to cut their spending, and pushing low-income households into poverty.

Businesses suffer too, as their costs also climb but the slowdown in activity in the economy makes it harder for them to meet these expenses.

In the UK, the Office for Budget Responsibility said last week that it expects inflation to peak at 8.7 per cent this year as it cut growth forecasts for 2022 from 6 per cent to 3.8 per cent.

It is already climbing at the fastest rate for 30 years – and led the Bank of England to raise interest rates from 0.5 per cent to 0.75 per cent this month. 

In a speech to the National Institute of Economic and Social Research think-tank, Broadbent said that the fact that Britain imports so much energy and other manufactured goods means the spiralling rises are hitting spending power on an unprecedented scale.

So even though the economy has not fallen, buying power has tumbled because inflation is pushing costs up. 

Broadbent said: ‘As a big net importer of manufactures and commodities it’s doubtful that the UK has ever experienced an external hit to real national income on this scale.

‘From the narrow perspective of monetary policy it will result in the near-term in the difficult combination of even higher inflation but weaker domestic demand and output growth.’

This post first appeared on Dailymail.co.uk