ECB: Geopolitical instability and high energy prices threaten growth in the eurozone
Despite the memorandum of understanding reached in June between the United States and Iran, the geopolitical situation remains fragile
‘Following the agreement on the memorandum of understanding between the United States and Iran, oil prices have fallen, but the new attacks are making the situation extremely unstable.’ This is stated in the ECB’s economic bulletin, which highlights how, following the signing of the memorandum of understanding between the United States and Iran – under which both parties undertook to restore free transit through the Strait of Hormuz – the price of Brent crude oil initially fell sharply. “More recently, however, following the new military attacks and after President Trump declared an end to the ceasefire, it has risen again, standing at a level 1 per cent lower, on the whole, than that recorded on 11 June, the start of the period under review.”
Downside risks to growth and upside risks to inflation
The growth outlook for the euro area is subject to downside risks, whilst the outlook for inflation is subject to upside risks. This is highlighted by the ECB in its Economic Bulletin, which emphasises that, despite the memorandum of understanding reached in June between the United States and Iran, the geopolitical situation remains fragile. Further disruptions to energy supplies could keep energy prices high, weighing on real incomes, consumption and investment. A deterioration in market confidence, tighter credit conditions and increased trade tensions could also weaken demand, exports and supply chains.
Russia’s war against Ukraine remains another major source of uncertainty. On the price front, an intensification of the energy shock could have indirect and second-round effects on inflation and wages that are stronger than expected. The fragmentation of global supply chains, shortages of critical raw materials and extreme weather events could fuel further pressures.
A lasting resolution to the conflict in the Middle East would, on the other hand, reduce the risks to both growth and inflation. Economic activity could also benefit from defence and infrastructure spending, reforms and the adoption of new technologies.
Eurozone outlook highly uncertain due to geopolitical factors and energy volatility
