The escalation of the conflict leads to a recession

Experts from Allianz Research and the Economic Research Department of Euler Hermes prepared a current analysis of the impact of the war on economies, primarily in Europe. In their opinion, the escalation of the Russian-Ukrainian conflict has significant economic and financial consequences, mainly in three areas: energy, trade, and the financial sector. It will depend on what sanctions are being implemented now and may be implemented in the future. It is worth noting that Russia is currently in a stronger position economically than it was in 2014.

Although the crisis and sanctions resulting from it will generally have a moderate impact on the current energy prices in EU economies (their peak so far is behind us), in the long run, prices of $90 per barrel of Brent or €90 / MW of gas will affect sentiment in the market, especially among households, increasing inflationary pressure.

"In the most extreme blackout scenario, in which Russia would stop supplying Europe with gas, gas prices would jump to an average of €140 / MW as alternative sources of supply are limited. Such a situation would raise our current inflation forecast by + 2.5pp. in the Eurozone (currently + 3.8% this year). A recession would then be inevitable," the report reads.

According to experts, the most likely scenario of an escalation of the conflict (estimated at 65% probability) will contribute to an increase in inflation in Europe (+100 basis points), a slower growth (-0.5pp), and a decline in the stock markets (-10%).

(WBJ)