Markets jittery as Ukraine war slows EU growth and China’s zero-Covid plan hits factory production fuelling fears of global recession
Financial markets were jittery yesterday as the European Commission and China stoked fears of a global recession.
The European Union slashed its 2022 growth forecasts and increased estimates for inflation.
At the same time China revealed how hard its economy had been hit by the latest Covid lockdowns.
Rates decision: The EU slashed its 2022 growth forecasts and increased estimates for inflation heaping pressure on ECB chief Christine Lagarde (pictured)
The EU’s economic growth is now set to come in at just 2.7 per cent this year.
That is down from 4 per cent three months ago, as soaring energy prices damage the bloc’s performance.
This gloomy revision coincided with the continent’s forecast for inflation – almost doubling to 6.1 per cent from 3.5 per cent.
War in Ukraine was the key factor behind the EU’s forecasts. The conflict has contributed to the pre-existing economic woes such as supply chain disruption and rising input costs.
These will pose difficulties for European Central Bank president Christine Lagarde as Europe looks to navigate its way through the headwinds.
Paolo Gentiloni, EU commissioner for economy, said: ‘Russia’s invasion of Ukraine is causing untold suffering and destruction, but is also weighing on Europe’s economic recovery.
‘The war has led to a surge in energy prices and further disrupted supply chains, so that inflation is now set to remain higher for longer.’
EU trade commissioner Valdis Dombrovskis added that ‘while growth will continue this year and next, it will be much more subdued than previously expected’.
‘Uncertainty and risks to the outlook will remain high as long as Russia’s aggression continues,’ he said.
China also posted a 2.9 per cent slump in industrial production last month, as its economy struggled under the weight of its zero-Covid strategy.
Factory closures rose in April as officials enforced strict lockdown restrictions in the face of cases rising to their highest since the start of the pandemic back in early 2020.
Total retail sales fell by 11.1 per cent, for the first four months of the year, while unemployment across 31 Chinese cities was 6.7 per cent.
Global markets reacted badly to the negative updates emerging from the EU and China, and Germany’s DAX index closed 0.5 per cent lower at the end of trading yesterday.
The Nasdaq index in New York finished down by 1.1 per cent at 11,6668.82. These latest figures will do little to allay fears of an economic downturn, particularly after the former Goldman Sachs chief Lloyd Blankfein said that there was a ‘very, very high risk’ of a recession.
He warned: ‘If I were running a big company, I would be very prepared for it.
‘If I was a consumer, I’d be prepared for it.’
Simon French, chief economist at Panmure Gordon investment bank, said: ‘There is a very real risk of a recession across a large range of countries.
‘I don’t think we should hide away from that.
‘If we would have hit this scenario in normal times, then a recession would be nailed on.’ However, he highlighted how many parts of the world are still experiencing a Covid recovery, such as in the transport and hospitality sector.
‘You can describe it, metaphorically, as a tug of war because in normal times you wouldn’t have the lean-in effect of the Covid recovery,’ he said.
However, given the soaring cost of staple products such as fuel and household energy bills, French said that ‘for a lot of households it will feel like a recession even if we don’t see it in the data.’
Inflation is expected to hit 9 per cent in the UK when official figures are released on Wednesday.