WOOD Flash – EEMEA macro: further thoughts on the energy crisis and comparison with 2022

It is legitimate to wonder how the current conflict in Iran may develop, going forward, and what parallel/lessons we could draw, compared to the inception of the Russia/Ukraine conflict in 2022. Back in 2022, the economies in EEMEA were in an inflationary phase: the COVID-19 stimulus was strong, labour shortages were significant, and the double energy-fertilisers shock added significantly to inflation momentum. Currently, most of EEMEA is running a negative output gap, the labour markets are tight, but not as much as a few years ago and consumer sentiment is constructive, but not at particularly high levels in a historical context. As a result, the financial markets have moved too quickly, in our view, to price in rate hikes. If the disruptions abate by the summer, inflation will be higher than anticipated, but not enough to trigger monetary tightening – bar, perhaps, in the Czech Republic. Instead, if the conflict worsens, inflation will jump, but consumption will likely slow down sharply, and also raise questions about a possible increase in the unemployment rate.