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Europe Macroeconomic Update: An Energy Crisis Afflicting European Economies Ahead of Winter

In this latest edition of the DBRS Morningstar Macroeconomic Update for Europe, we discuss how the energy crisis is afflicting the euro area economies and the UK ahead of winter.

Key Highlights
EURO AREA
• DBRS Morningstar expects slow growth in the EA in the near term, as economic activity is affected by Russia's invasion of Ukraine, especially through weaker confidence and higher inflation. Consumer confidence fell in March to its lowest level since May 2020, DBRS Morningstar expects growth in the EA to weaken in the near term as households and firms face an energy crisis, which has led to high energy prices and weighed on economic sentiment.
• Price pressures, still largely driven by high energy prices, have continued to intensify and are expected to lead to further hikes in policy interest rates.
• Downside risks to the near-term EA economic outlook largely relate to an intensification of the energy crisis, potentially leading to a severe rationing in energy consumption and higher prices.

UNITED KINGDOM
• In DBRS Morningstar' view, uncertainty is adding to the UK growth outlook in the near term, amid still high inflation, monetary tightening, and financial market volatility.
• Following the announcement the 'mini budget', and given the fiscal loosening envisaged, markets now expect the Bank of England (BoE) to raise the policy rate to higher levels.
• Downside risks to the UK economic outlook include significant tightening in financial conditions, a more severe deterioration in economic sentiment and an intensification of the energy crisis.

“The increase in alternative sources of gas, the refill of gas storage, and a reduction in gas demand should help avoid a more severe gas rationing this winter. That said, additional disruptions in energy supplies or a colder winter would intensify the energy crisis in Europe, leading to even higher energy prices or a severe rationing in energy consumption. We see this as the main risk to the outlook at the moment,” said Adriana Alvarado, Senior Vice President in the Global Sovereign Ratings Group.