The war in the Ukraine and resulting sanctions on Russia are a potential “game changer” that threatens to fundamentally shift the entire model of the European economy.

CNBC/Elliot Smith
Russia’s war in Ukraine means there’ll be no return to normality for Europe’s economy

The war in Ukraine and the ensuing economic sanctions imposed on Russia will cause far bigger shifts for Europe’s economy and markets than previous crises like the coronavirus pandemic, economists have said.

In light of Russia’s unprovoked invasion of Ukraine, European leaders have been forced to rapidly accelerate plans to reduce their outsized dependence on Russian energy. The European Parliament on Thursday called for an immediate and total embargo of Russian oil, coal, nuclear fuel and gas.

However, this aggressive decoupling comes at a price for the European economy, driving up already high inflation to record levels and threatening to undermine the manufacturing recovery that began last year as economies attempted to re-emerge from the Covid-19 pandemic.

ING Head of Global Macro Research Carsten Brzeski noted last week that Europe is particularly at the risk of losing international competitiveness as a result of the war.

“For the continent, the war is much more of a game-changer than the pandemic ever was. I’m not talking just in terms of security and defense policies but notably about the entire economy,” Brzeski said.

“The eurozone is now experiencing the downside of its fundamental economic model, that of an export-oriented economy with a large industrial backbone and a higher dependency on energy imports.”

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Kitco/Anna Golubova
Inflation ’causes recessions,’ price pressures already out of control, warns BofA

Just ahead of the U.S. March consumer price index (CPI) data release, Bank of America (BofA) warned that inflation “causes recessions” and price pressures are already out of control.

All eyes are on Tuesday’s U.S. inflation macro release this week. Market consensus calls expect annual inflation to surge to 8.4% — a new four-decade high. Close attention will is being paid to a rise in food and gasoline prices.

In light of the current macroeconomic and geopolitical situation, a recession is coming, said BofA strategists in their recent report.

“‘Inflation shock’ worsening, ‘rates shock’ just beginning, ‘recession shock’ coming,” the strategists said. “Inflation causes recessions … Late-60s recession preceded by consumer price inflation, 1973/4 by oil/food shocks, recession of 1980 by oil, 1990/91 by CPI, 2001 by tech bubble, 2008 by housing bubble; last dominos to drop in terms of recession expectations is higher yields & weaker dollar, and steeper yield curve and banks/consumer keep falling.”

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Fox Business/Megan Henney
Americans’ inflation fears surge to another 11-year high, New York Fed survey shows

Americans’ inflation fears skyrocketed again in March, with concerns over rising prices hitting the highest level in more than a decade, according to a key Federal Reserve Bank of New York survey published Monday.

The median expectation is that the inflation rate will be up 6.6% one year from now, topping an 11-year-high recorded in February, according to the New York Federal Reserve’s Survey of Consumer Expectations, which dates back to 2013. Three years from now, consumers see inflation hitting 3.7% – down slightly from 3.8% the previous month and well below the peak of 4.2% recorded in late 2020.

“Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the short-term horizon, reaching a new series high,” the survey said. “At the medium-term horizon, median inflation uncertainty remained unchanged at a series high.”

With consumers raising their expectations for inflation over the next year, they believe that things like gasoline, food, medical care, rent and college tuition will get more expensive for them to buy.

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