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Picture: SUPPLIED
Picture: SUPPLIED

Factories from Australia to Europe are seeing already surging costs jump further as Russia’s war in Ukraine and the barrage of sanctions rolled out in response roil commodity markets and trade.

While the relaxation of pandemic restrictions helped overall business activity weather the initial shock from the invasion, dwindling confidence is threatening economic growth in the coming months, according to March surveys of purchasing managers by S&P Global, which offer a first glimpse at the conflict’s spillover effects.

Rising expenses are denting sentiment in Asia, with input prices at a 14-year high in Japan and a record in Australia. In the eurozone, which borders Ukraine, manufacturers are facing an “unprecedented” rise in costs for parts and raw materials, which is set to feed into consumer inflation.

“Had it not been for the easing of Covid-19 containment measures to the lowest since the start of the pandemic, business activity would have weakened far more sharply,” Chris Williamson, an economist at S&P Global, said about the currency bloc.

While this short-term boost will fade in the coming months, record price pressure on factories “will inevitably feed through to higher consumer prices in the months ahead”, he said on Thursday in a statement.

The fear is that soaring inflation will weigh on economies, with the IMF poised to cut its global growth forecast for 2022. While the US has “fairly strong fundamentals”, other countries face the risk of recession, MD Kristalina Georgieva said this week.

Despite inflation running at three times the European Central Bank’s 2% target, president Christine Lagarde played down stagflation concerns this week, saying that even the “severe” 2022 scenario modelled by her staff envisages growth of more than 2% for the eurozone economy.

Still, the currency bloc “has the most to lose” from the conflict because of its dependence on Russian energy and closer trade ties with that nation, according to Bloomberg Economics.

There are signs of disruption in Germany, where the war has thrown into doubt a planned spin-off of Thyssenkrupp’s steel business. Car-parts maker Schaeffler has also scrapped its earnings forecast, while Mercedes-Benz is readying plans to cope with potential shortages of natural gas.

In the UK, chancellor Rishi Sunak said on Wednesday that this year’s growth projection has been cut to 3.8% from 6%, with the treasury identifying inflation — at a three-decade high — as the biggest economic threat.

While looser virus curbs helped Britain maintain robust growth in March, deteriorating business expectations signal softer activity ahead, S&P Global said. The combination of a potentially sharp slowdown and a worsening cost of living crisis “paints an unwelcome picture of ‘stagflation”, Williamson said.

“We’ve never managed the business through a period of inflation like the one we’re seeing at the moment,” Simon Wolfson, CEO of UK clothing and housewares retailer Next, said on Thursday as the company lowered its profit and sales guidance for 2022. “It’s very difficult for us to make an assessment as to what effect our price increases will have on total sales.”

Governments across Europe and in the UK are trying to ease the war’s knock-on effects for households by offering tax breaks, cheaper fuel and income support.

But with the extent of the crisis still unclear, a European Commission gauge of confidence has slumped to its lowest level since the early months of the pandemic, while statistics offices in countries including France have halted forecasts due to the uncertainty.

“A number of recent developments look more worrying than the resilient PMI headline numbers,” said Frederik Ducrozet, global strategist at Banque Pictet, referring to purchasing managers’ indices. “Today’s stagflation shock is massive, hurting supply chains at the worst possible time.”

Bloomberg News. More stories like this are available on bloomberg.com

 


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