(Finance) – One of the main effects of war in Ukraine on the European economy is the big one loss in terms of terms of trade for most countries, according to a new report by Fitch Ratings. The terms of trade is the ratio at which goods from different countries are traded. The rating agency argues that this shock simultaneously pushes up inflation, lowers real incomes, weakens external finances and puts pressure on monetary and fiscal policy.
It is emphasized that i import prices they began to rise rapidly in 2021 from a very low base, having fallen during the pandemic. Annual growth rates in the eurozone, Germany, France and Italy were 15% -20% in the first quarter of 2022, the strongest in a decade.
The large import price shock results in a significant deterioration of export and import prices (terms of trade) of European energy-importing economies. “Our calculations show that the deterioration is almost 3 times greater than the historical standard deviation in Italy, which has the highest share of natural gas imports in Western Europe – the study reads – The shock is 2.4 times the norm. historic in Germany and twice in France, which has the lowest energy dependence of the three countries “.
The deterioration of the terms of trade opens a gap between the harmonized index of consumer prices (HICP) and the GDP deflator.
“Imported energy is the main driver of the HICP surge and the corresponding index of domestic consumption and investment. However, for the aggregate GDP deflator, the pressure on prices is partly offset by the deterioration in the terms of trade – explains Fitch – The extensive pressure on domestic prices has triggered a monetary tightening by the ECB stronger than expected. Modest nominal GDP growth creates a less favorable environment for debt relief than high HICP inflation would imply. ”