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Russia's invasion of Ukraine has caused several spill over
effects, which for European economies are having an uneven impact
at both the country and the
subnational level. Key spill over effects are an increase in
oil, gas, and electricity prices; a further boost to consumer price
inflation; increased uncertainty and financial stress hindering
business investment since the coronavirus disease 2019 (COVID-19)
pandemic, and the gradual withdrawal of monetary policy stimulus by
the European Central Bank.
Importantly, these spill over effects will have different
implications for growth rates depending on the regional
distribution of economic sectors far outside of Russia and Ukraine.
Notably, the growth trajectory of certain economic sectors is
diverging because of disruption to the supply and prices of
construction and manufacturing inputs like lumber, steel, and
electronic components, while an increase in migration outflows is
impacting the availability of the labor force.
Due in part to significant downward revisions to the value added
provided by the construction and manufacturing sectors, the largest
contractions to nominal GDP growth according to our April 2022
forecast revisions are in Czechia, Italy, and Poland, where annual
GDP growth has been revised down by over 4%. By contrast,
improvements in agriculture and mining suggest that Turkey is now
projected to experience a less severe economic contraction, with
annual nominal GDP growth being revised upwards from -16.8% to
-13.1%.
Uneven sub-national trajectories
Regions specialized in sectors that have been adversely impacted
by Russia's invasion of Ukraine are set to face worse economic
growth outlooks than what is implied by the country-level trend.
While spill over effects in some cities such as Berlin or
Bratislava were weaker than the country level effects, other cities
were hit harder. For instance, automotive manufacturing hubs in
Germany, like Ingolstadt, Munich, and Stuttgart, all saw larger
downward revisions in their economic growth outlook than the
national average.
Negative spill over effects are also pronounced in cities that
are exposed to the real estate and construction industries, which
experienced a large decline due to labour shortages, supply chain
disruptions, and rising consumer price inflation due
to war. By contrast, regions based in rural areas saw that the
negative spill over effects were cushioned by improvements in the
agricultural and mining industries.
Poland
Poland is one of the countries that was hardest hit by Russia's
invasion of Ukraine. The main transmission mechanisms are rising
energy and food prices due to supply chain bottlenecks, increased
fiscal outlays associated with the influx of Ukrainian refugees and
rising security expenditure, and also the impact of persistent
labour shortages driven by Ukrainian economic migrants returning to
support the war effort. The 2022 nominal GDP growth forecast for
Poland's two largest cities, Warsaw and Krakow, dropped by
5.3% (from 9% in February to 3.7% in April) and 4.8% (from 9.7% to
4.9%) respectively. Wholesale and retail trade account for 22% of
all gross value added (GVA) in Warsaw and its estimated 2022 GVA
growth dropped from 9% in February to 3.6%. in April. This
contraction in the wholesale and retail trade sector contributed to
the decline in Warsaw's 2022 GDP growth rate.
Krakow is characterized by a large manufacturing industry (26%
of all gross value added) that suffered from rising inflation. The
small mining and agriculture industries in both cities benefited
and GVA was boosted by increased demand and exports. However, these
industries contribute less than 2% to Warsaw's and Krakow's total
gross value added and so do not offset the cities' overall decline
in performance.
Italy
Extended supply chain disruptions and elevated inflation
damaging household purchasing power have also weakened Italy's
growth prospects. These impacts have fed through to Italy's cities,
with Rome's 2022 nominal GDP growth revised downward from 2.8% in
February to -2.4% in April. This revision was larger than the
country-level revision as Rome's key sectors real estate and public
administration took negative hits. In contrast, Florence's 2022 GDP
growth forecast revision was smaller than the country level
revision. The dominant sectors in Florence are manufacturing, and
wholesale and retail trade, both of which improved slightly between
the February and April forecasts.
Sector-level drivers
The negative spill over effects of Russia's invasion are most
pronounced in the construction and manufacturing sectors.
Construction
The war has particularly affected the construction sector by exacerbating historically high
labour shortages, especially in Eastern Europe given the
outflow of Ukrainian workers participating in the war effort. This
is combined with a significant shortfall in the supply of lumber
and a general reduction in demand for nonresidential buildings.
According to data sourced from our Global Trade Atlas, Russia ranks
as the largest exporter of lumber to the EU, followed by Belarus,
and Ukraine, which collectively accounted for 42% of total imports
by value in 2020. Soaring energy costs are also having a negative
impact on building material manufacturers, resulting in a reduction
in output of certain products. As a result of these factors, our
Construction Service anticipates that real construction spending in
Western Europe will grow at a significantly slower rate of 1.6% in
2022, down from 5.8% in 2021.
Manufacturing
Manufacturing in Europe has also been negatively impacted,
especially in certain manufacturing sub-sectors. Europe's steel
sector, which provides crucial inputs for the automotive and
construction industries, relies heavily on inputs from Russia and
Ukraine - both countries rank in the top five globally for reserves
of iron ore. Russia is the EU's largest source of iron and steel
imports, representing 16.6% of the EU's total imports by value in
2020 - Ukraine was the fifth largest at 9.2% of total imports. The
manufacturing sectors most affected by the war are automotive,
electrical equipment; machinery and equipment; and computer,
electronic, and optical products. Key inputs for these sectors are
palladium (with 40% of global production coming from Russia) and
neon gas (with Ukraine providing 90% of worldwide supplies).
Moreover, Ukraine is a leading source of wiring harnesses for cars.
The disruption on key inputs supply has severely impacted the production of light
vehicles.
Agriculture and mining
Certain sectors have instead benefitted from the war, notably
agriculture and mining. This is largely because of the need for
substitutes in cases where supplies are concentrated in Russia and
Ukraine. Agriculture is in general less dependent on international
supply chains, so shortages of raw inputs from Ukraine and Russia
have less of an impact. However, this is not the case for food
manufacturing, which is dependent on raw material inputs from local
and international markets. As Russia and Belarus are important
producers of raw materials for fertilizer agricultural production
will slow down in regions where this cannot be replaced.
