The Russian President ordered Russia’s first mobilisation since World War Two, warning the West that if it continued what he called its “nuclear blackmail”, Moscow would respond with the might of all its vast arsenal. At the news, the euro tumbled to a two-week low against the dollar, European stock markets slipped, and investors piled into safe-haven bonds, pushing yields on German and US government debt down.
Deutsche Bank analysts in a note today said they forecast a deeper recession for Europe next year.
They wrote: “We are revising the euro area GDP forecast for 2023 from -0.3 percent to -2.2 percent.”
Europe’s STOXX index briefly fell to its lowest since early July, while the euro stocks volatility index jumped to its highest in more than two weeks.
European Central Bank Vice President Luis de Guindos said on Wednesday that even a recession over the winter is not enough to reduce inflation without further rate hikes.
Growth has been suffering due to high energy costs and a loss of Russian gas, raising the risk of energy rationing over the winter while households and businesses take a financial hit from high costs.
“Markets believe that the slowdown of the economy would reduce inflation by itself,” Mr de Guindos told a conference.
Colin Asher, senior economist at Mizuho Corporate Bank in the UK, echoed: “The initial implications are clear: it’s a potential escalation which is negative for the outlook in the eurozone, and so it’s unsurprising that the euro is weaker. It has boosted risk aversion more broadly, so the dollar is stronger.
“It was interesting to me that dollar/yen dipped on the news of the announcement, potentially indicating a return of the yen’s safe-haven credentials which have been absent for much of the year.
“If the conflict in Ukraine escalates then that’s clearly negative for growth, but it’s not clearly disinflationary. An escalation may add to supply chain strains.”