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Europe Macroeconomic Update: Supply Bottlenecks and Spike in Energy Prices

In this latest edition of the DBRS Morningstar Macroeconomic Update for Europe, we discuss the supply bottlenecks and the spike in energy prices that Europe is experiencing and the implications for the inflation outlook, monetary policy and economic outlook in the near term.

Key highlights:

EURO AREA
-- DBRS Morningstar expects some of the factors leading to higher inflation in the euro area (EA) to be transitory. Price pressures, so far largely emanating from supply shortages and high energy prices as economies recover, vary across EA countries.
-- The outlook for inflation is key for the European Central Bank's policy. A tightening in monetary policy looks unlikely in the near term, as inflation expectations seem well-anchored. Nevertheless, risks of more persistent supply bottlenecks and high inflation seem to be increasing.
-- Supply bottlenecks pose a downside risk to the near-term economic outlook, while high inflation could slow the demand-driven recovery. Accumulated household savings provide some buffer for now and governments are taking measures to limit the impact from high energy bills.

UNITED KINGDOM
-- In DBRS Morningstar's view, some of the drivers of recent higher inflation in the UK are temporary, while supply bottlenecks could be more persistent. Moreover, energy prices, the most volatile component of inflation, will likely continue increasing in the coming months.
-- In contrast to the EA, a tightening in monetary policy in the UK is looking more likely in the near term, as suggested by recent comments by the Governor of the Bank of England.
-- Ongoing supply bottlenecks pose a downside risk to the near-term economic outlook, while high inflation could cause a sharper-than-expected deceleration in growth by dampening consumption.

“A key downside risk to the European economic outlook in the near term is now stemming from supply bottlenecks and high production costs. Although inflation is not a major downside risk to the near-term outlook, it could still cause a slowdown in growth. That said, we still expect the economic recovery to be driven by consumer spending” notes Adriana Alvarado, Vice President in the Global Sovereign Ratings Group.