April 20, 2022 1:54 pm

Stagflation risks: Germany, Italy, Greece and Spain in focus

The war in Ukraine has unleashed a new negative shock across the eurozone before the recovery from the pandemic was completed. The economic outlook for economies across the euro area has deteriorated, elevated inflation and waning economic growth risk stagflation. The impact across member states and sectors will vary widely. Ultimately, stagflation lowers business investment and jobs growth while higher prices destroy demand, reducing growth further. This dynamic is at risk of playing out across many economies throughout the eurozone. In this article, we examine the outlook for select eurozone economies.


The accelerated energy shock in Germany propelled the annual rate of inflation to 7.3% in March, its highest level since German reunification. Energy inflation surged to 39.5% in March (February: 22.5%), while March’s inflation print was more than 200 basis points higher than February and above the 6.7% consensus forecast. April’s forward-looking sentiment surveys suggest companies are struggling under the weight of soaring prices and supply shortages. GDP contracted by 0.3% in Q4, as Omicron weighed on demand while chip shortages have constrained automotive production. The risk of a technical recession – and a stagflation scenario – is plain to see.

Germany, Europe’s largest economy, which depends on Russia for more than half of its natural gas, is looking to cut off almost all Russian crude by the year-end. If Russia decides to cut supplies to European countries that have imposed sanctions over the war, gas-reliant industries (e.g., automotive) would be forced into halting production, nudging the recession risk higher. The prospect of power rationing in the eurozone has already begun in Germany and Austria, as officials rush to avoid a potential halt in deliveries from Russia over payment disputes.

A group of economists who advise the German government warned of a “substantial risk” of recession if Russian energy imports were cut off, which could drive inflation as high as 9%, the Financial Times reported. The Federation of German Industries (BDI), the German business lobby group which represents more than 100,000 domestic companies, warned that cutting off Russian gas supplies to the EU would “jeopardise the unity and ability of the EU to act both economically and politically”.  The BDI continued: “A lack of energy supplies would threaten production stoppages with incalculable consequences for supply chains, employment, and also our country’s ability to act politically.”

The lobby group urged policymakers to move quickly to forge new energy partnerships and procure liquefied natural gas from the US. In the near term, markets are expecting further government support schemes to dampen the adverse impact of the war, but these will unlikely be sufficient to avoid stagflation. For the remainder of the year, growth forecasts have been revised downwards. ING now forecasts German annual GDP of 1.4%, which would delay the economy’s return to pre-pandemic levels until the end of this year.


The fallout of the war will have grave consequences for Italy’s growth prospects, as higher borrowing costs weigh on public and private sector finances and pose a refinancing risk to corporates. Italy’s dependence on Russian energy risks creating new bottlenecks across sectors such as agricultural commodities, and across supply chain routes more broadly. These problems may simultaneously create a supply shock and a demand drag in the economy.

Italian GDP fell negative in the first quarter, shrinking by 0.5% on a quarterly basis, compared to 0.6% growth in the previous three months, according to government data. The decline was attributed to the resurgence in new Covid cases at the turn of the year, surging energy prices due to the war, which caused headline annual CPI inflation to surge to 6.5% in March, representing the hottest print since 1990. However, core inflation was still below 2%. Energy inflation soared 59% compared to one year ago, while food prices were up 5.8% from a year ago.

In a hypothetical adverse scenario by the Bank of Italy, where the supply of gas from Russia is interrupted and only partly be compensated from other sources, GDP would fall by almost 0.5 percentage points in 2022 and 2023, while inflation would average just below 8%. More substantial Italian government, or EU stimulus, may be required, but inflation will weaken the purchasing power of new stimulus. Within the EU, more monetary stimulus may also be politically difficult to justify in light of the EU Treaty’s monetary financing prohibition. Interest rate hikes cannot protect businesses and households from surging energy costs, while higher borrowing costs will increase corporate refinancing risk.


The outlook for GDP growth in Greece’s economy in 2022 has been downgraded to 3.8%, from a pre-war forecast of 4.8%, according to the Bank of Greece’s new baseline scenario. The downward revision compares with 8.3% last year. In this scenario, inflation is expected to accelerate to 5.2% in 2022. In the central bank’s adverse scenario, the Greek economy grows by 2.8% due to surging inflation which peaks at 7%. Greece’s central bank expects inflation to unwind in 2023, provided that supply chains and energy prices both normalise.

The implied rising interest rate and weakening GDP growth will weaken public debt dynamics and reverse recent progress in lowering Greece’s debt-to-GDP ratio. Lower growth, surging inflation, and higher borrowing costs represent refinancing risks for corporates and there is the prospect of a new vintage of non-performing loans (NPL) after the withdrawal of support measures. At this stage, further Greek NPLs in 2022 are a rising risk. Much depends on the duration and severity of the war, the duration of energy and food supply pressures, the trajectory of the pandemic, financial market confidence, and the fragility of global supply chains.  Sensitive sectors include manufacturing, retail, hospitality, and tourism.

The stock of NPLs declined in 2021 through loan sales of €27.5 billion under the Hellenic Asset Protection Scheme. NPLs stood at €18.4 billion at the end of December 2021, down by €28.8 billion from end-December 2020. This has led to improved bank asset quality, reducing risk costs, and widening profit margins. However, Greek NPLs as a percentage of total loans (12.8%) remains well above the EU average of 2.1%, according to the Bank of Greece, with about 39% of NPLs subject to forbearance measures. In contrast, a high share of forborne loans fell back into arrears in the first quarter. The stock of NPLs remains a burden for the real economy, the Bank of Greece said.


The war has upended Spain’s economic recovery from the pandemic, delivering a severe economic shock that has diminished the Spanish growth outlook. Spain’s central bank has more than doubled annual inflation forecasts for 2022, while GDP growth projects have slimmed. Consumer prices are forecast to surge 7.5% in 2022, according to the Bank of Spain, up by 3.8 percentage points on its December forecast, as measured by Harmonised Index of Consumer Prices (HICP). Spanish GDP is projected to increase by 4.5 % in 2022 and by 2.9% in 2023, down 0.9 and 1.0 percentage points respectively.

The annual rate of inflation rose to 9.8% in March, more than two percentage points higher than in February, and the hottest print since 1985, according to the National Statistics Institute (INE). Housing-related prices surged by 33.1% over the year to March, led by heating and fuel costs, while food prices were up to 6.8%.

Spain’s central bank warned elevated inflation may persist, sanctions on Russia may further deteriorate external trade volumes, supply bottlenecks worsening the outlook for global growth, while the uncertainty weighs on the consumption and investment decisions of households and firms. In addition, firms are not currently passing on rising input costs into the price of products and services; instead, companies’ profit margins are narrowing. However, this stage could come next, as business owners and workers look to neutralise the impact of the energy shock on real incomes, triggering second-round effects on prices and wages. Additional risks to the economic outlook include the intensity of indirect and second-round effects on inflation, the development of financing conditions in the context of ECB monetary policy tightening, the implementation of EU funds to member states and the course of the pandemic.

In the second half of 2022, futures market pricing implies energy prices will ease, allowing inflation to fall back, which gives some hope that the destructive effects of inflation may be temporary to some degree. However, it is too early to be definitive either way. According to the Bank of Spain, the Spanish economy’s return to pre-pandemic GDP levels is pushed back to Q3 2023.

This post was written by James Wallace

James Wallace is an editor, journalist, researcher and corporate writer on economics, geopolitics, finance, real estate, private equity, aviation, infrastructure and technology. He co-founded CoStar News in the UK in April 2011, and now works for multiple media organisations and corporations across writing, research, marketing/PR and consulting. He is an aspiring psychologist.


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