Economic recovery at risk due to war in Ukraine

Expected German recession would have major impact on Dutch economy.

According to the Global Economic Conditions Survey (GECS), the modest post-pandemic recovery of the European economy is at risk due to volatile energy markets and an expected German recession. This global survey by IMA and ACCA is completed by more than 1,000 accountants, including more than 150 CFOs, and reveals the status of the current economic situation through the eyes of leading financial professionals.

The survey was conducted in the period just before and after the Russian invasion of Ukraine, so the global economic consequences of this conflict have not yet been fully captured in the results.

?What does the last quarter’s report show?

-???????Trust: Contrary to the trend in the previous surveys, trust in the economy increased slightly in Q1 2022. While the indicators show stable growth, there are large regional differences. In contrast to the modest increase in trust in Western Europe, the ongoing war is expected to cause a decline in the next quarter.

-???????Orders: The level of orders remained relatively equal in Q1. Out of all regions, Western Europe reported the highest number of orders.

-???????Economic Recovery: The global economic recovery continues on a modest scale. However, Germany - largest trading partner of the Netherlands - will most likely end up in a recession. This will have a direct impact on the Dutch economy.

-???????Inflation: Whereas inflation in the Eurozone was expected to average 3.2% in the previous quarter, this expectation has been revised to an average of 5.1% in Q1. Disruptions in the energy market and continuous supply chain shortages are important factors for the current level of inflation.

-???????Operating costs: After a big jump in the last quarter, the GECS concern index on operational costs is now at a record level. This is a result of high inflation and labor shortages

-???????Fear: The two fear indices – measured by the concern that customers and suppliers may go bankrupt – again did not change much this quarter. Both have recovered from the extreme levels reached during the corona crisis, but are still above pre-pandemic levels.

?Reduced growth in Western Europe

Trust in the economy has increased marginally, but an early indication of the impact of the war in Ukraine shows that developed economies will grow 1% to 3% less. In a recent report, the Centraal Plan Bureau predicts that Dutch growth will be 1.4% less than expected. The GECS also shows that a recession can be expected in Germany, the Netherlands' largest trading partner, which would have negative effects for the Netherlands as well. Before the Russian invasion, the economy was expected to continue its recovery to pre-pandemic levels. Although a global recession is not expected, the economy will clearly not grow as fast as predicted.

Figure 1: Chart 12 Western Europe, Source ACCA/IMA (2012-22)

?Energy price as a driver of inflation

Europe is dealing with the consequences of the war in Ukraine, but the economic effects of this conflict are not yet fully understood. For now, 40% of gas consumed by the EU is provided by Russia. A disruption in gas supplies could have disastrous effects for the EU. The ECB expects that a 10% drop in the gas supply would result in a GDP reduction of 0.7%. A sudden drop of 40% would send the entire European economy into a recession. Demand for oil and gas was already significantly heightened due to the global economic recovery, and gas prices have been increasing further as the war in Ukraine is making the energy market more volatile. Many countries are using gas in their energy transition, so gas demand is expected to remain relatively high over the coming years. Driven by these factors, energy prices are at record highs and inflation is expected to reach 4.1% in 2022. Energy prices are expected to start declining gradually over the course of 2022, having a downward effect on the expected inflation in 2023.

About the Global Economic Conditions Survey (GECS)

The Global Economic Conditions Survey (GECS) is the world's largest recurring economic survey of accountants. It has been conducted for more than a decade by the global trade association of controllers and management accountants (IMA) and the Association of Chartered Certified Accountants (ACCA). The key indices are a good reflection of economic activity and provide valuable insight into financial professionals' views on key variables, such as investment, employment and costs. Fieldwork for the Q1 2022 survey took place between February 14 and March 1, 2022, and yielded 1,016 responses from ACCA and IMA members, including more than 150 CFOs. For more information on GECS, visit https://www.imanet.org/insights-and-trends/global-economic-conditions-survey?ssopc=1

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