Financial rating agency has Moody’s warned that the war in Ukraine is increasing the risk of stagflation in the European Union (EU), placing Portugal among the most vulnerable countries in terms of exposure to inflation. “The Russian invasion of Ukraine has exacerbated underlying demand and supply issues and pushed inflation to levels not seen in the EU since the mid-1980s,” said senior Moody’s analyst Heiko Peters.
The analyst points out that a stop in the supply of natural gas by Russia “will likely intensify these pressures, weaken economic activity and increase the risk of a stagflationary environment”. Stagflation, that is, recession or economic stagnation with high inflation, would result from forecasts of 2.5% growth in the EU economy in 2022 and 1.3% in 2023, together with a deceleration in inflation, which Moody's expects to be 6.8% this year and 4.4% next.
Even so, changes in regional and international supply and demand, along with structural changes, “such as the transition of EU countries from importing Russian energy, have increased the risks”. For stagflation to happen, however, Moody's points out that price dynamics would have to be held back by factors “such as prolonged higher energy prices”, noting that fiscal and monetary policies focused solely on growth “can also increase the risk of a stagflation scenario”.
Moody's also warned of southern Europe's exposure to this phenomenon. “Based on a number of indicators that suggest differences in exposure to inflation, significantly lower growth and responsive policies, we see southern Europe more exposed to a stagflation scenario,” says the rating agency.
“The countries that are most likely to see this transitory price increase become permanent and have fewer political resources are Malta, Cyprus, Portugal, Slovenia and Croatia”, they point out. Portugal is named by Moody’s as the seventh country most exposed to inflation and 20th in the ranking of political resources among the 27.