PwC/AGEFI Monthly Barometer - April 2022

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

April 2022

The PwC economic barometer recorded a significant drop of 29 points in March, reaching 18 at the end of the month. As expected, this sharp drop reflects the current geopolitical landscape around the Russia-Ukraine conflict, as well as the economic consequences that stem from it.

Rising energy prices were one of the key concerns for individuals and businesses in Luxembourg and despite being evident since the beginning of this year, the situation was exacerbated during March. Specifically, both crude and brent oil indices recorded their most volatile trajectories since 2014, with oil futures reaching as high as USD 139 in intraday trading. This sharp increase in oil prices resulted in higher prices at the pump, thus negatively affecting the purchasing power of households and elevating business costs. With the latter being unable to absorb this sharp increase, these costs were eventually passed on to end consumers, further contributing to rising inflation. On a positive note, the Luxembourgish GDP grew by 0.5% quarter-on-quarter, bringing the overall 2021 growth to 6.9% (compared to -1.8% in 2020). However, the outlook for the first quarter of 2022 remains debatable, as the Russia-Ukraine conflict and heightened prices are weighing against businesses and households.

In line with the decrease in hospitalisations and infections related to COVID-19 in Europe, health restrictions have continued to ease across the continent. As a result, business activity in the Eurozone posted a positive growth rate during March – only slightly lower than the one posted in February, with the services sector claiming the lead over manufacturing. Job growth was favourable during this period with many businesses increasing their staff levels, while backlogs of work rose for the thirteenth consecutive month. Nevertheless, business confidence plummeted to a 17-month low during March, with businesses highlighting the current global landscape and the sharp rise of input prices as key factors in creating uncertainty. New export orders declined for the first time since late 2020 and, despite the fact that demand conditions were favourable in March, businesses are bracing themselves for a bumpy road ahead.    

The conflict in Ukraine has undoubtedly generated uncertainty at a global level and is affecting economies through numerous channels. Although the most pronounced effects are on the markets of oil and gas, prices of raw materials such as aluminium, nickel, titanium and palladium were also on the rise, given the role of Russia as a key exporter of these commodities. This is also true for grains, with Russia and Ukraine accounting for 20-25% of world exports of wheat, corn and barley. In a recent report, the Economist Intelligence Unit (EIU) highlighted three channels through which the conflict is impacting the global economy: a) financial sanctions that limit the flow of goods from Russia to the western economies, b) commodity prices that will most likely remain elevated for the duration of the conflict and c) more supply chain disruptions given the destruction of certain infrastructure in Ukraine (such as ports), the halting of commercial shipping from Ukraine and the ban of air travel between Europe and Russia. As a result, the EIU is expecting global inflation to exceed 6% in 2022, further hampering the economic growth prospects for the year ahead.