Europe cost of living to spiral as Ukraine war drags on: Lagarde

NICOSIA: European Central Bank chief Christine Lagarde warned Wednesday that a prolonged conflict in Ukraine would keep energy prices and the cost of living for Europeans spiralling.

During a visit to Cyprus, Lagarde said Russia’s invasion of Ukraine last month had brought “considerable uncertainty” to the outlook for European Union economies.

The ECB boss said the conflict had stunted a quicker-than-expected rebound from the Covid-19 pandemic with a job-rich recovery.

“The economic impact of the war is best captured by what economists call a ‘supply shock’ which... simultaneously pushes up inflation and reduces growth,” she told an event in Nicosia.

Lagarde said energy prices were expected to stay higher for longer, with gas rising by 52 percent since the start of the year and oil prices up by 64 percent.

Food prices were also likely to come under pressure, she said, with the two former Soviet states accounting for 30 percent of wheat exports.

“Global manufacturing bottlenecks are likely to persist in certain sectors,” she said.

Lagarde said households were becoming more pessimistic and could cut back on spending.

“Consumer confidence this month has fallen to its lowest level since May 2020 and stands well below its long-term average.”

Lagarde said investment by businesses was likely to be impacted.

“Clearly, the longer the war lasts, the higher the economic costs will be and the greater the likelihood we end up in more adverse scenarios,” she said.

“With the right policy response, we can mitigate the economic consequences of the war and manage the high levels of uncertainty we are facing.”

The ECB president said the war in Ukraine had underlined the “deep strategic vulnerabilities in our security and trade relationships, which we can only address by being more united”.