Europe’s economic recovery slowed in the first weeks of March after Russia’s invasion of Ukraine disrupted supply chains, weakened confidence and sent raw-material and energy prices soaring, business surveys showed.

       The lifting of pandemic restrictions on Europe’s services sector is softening the blow for now but as this positive effect fades, economists expect the war to take a heavier toll on growth as higher energy costs push consumer prices up.

       The United Nations Conference on Trade and Development Thursday lowered its forecasts for economic growth this year, in response to the invasion. It now expects the global economy to grow by 2.6%, having previously expected to see an expansion of 3.6%. Much of the slowdown will occur in the eurozone, where Unctad now expects to see growth of just 1.7%, half of what it had previously expected. By contrast, it lowered its forecast for U.S. growth to 2.4% from 3%.

       Data firm S&P Global Thursday said its composite Purchasing Managers Index for the eurozone—a measure of activity in the manufacturing and services sectors—fell to 54.5 in March from 55.5 in February. This was a smaller fall than predicted by economists surveyed by The Wall Street Journal last week. A reading above 50.0 points to an increase in activity.

       Many European countries rely heavily on Russia for energy supplies, including oil and natural gas that is transported through pipelines. Energy prices had been rising in the months leading up to Russia’s invasion of its neighbor on Feb. 24, and have continued to increase since then on worries that supplies will be interrupted over coming months.

       As a result, eurozone businesses reported the sharpest rise in costs since the survey began to collect records in 1998. The subindex that measures costs rose to 81.6 in March from 74.8 in February, well above the previous record high of 76.0 in November 2021. In response, businesses raised their own prices.

       “The war has aggravated existing pandemic-related price pressures, which will inevitably feed through to higher consumer prices in the months ahead," said Chris Williamson, chief business economist at S&P Global.

       The invasion also dealt a blow to eurozone consumer confidence, according to a survey released by the European Commission Wednesday. The monthly poll recorded weaker sentiment in early March comparable to that seen when the pandemic struck in early 2020.

       S&P Global said Europe’s automobile makers were among the hardest hit businesses in the early weeks of the invasion. The conflict caused shortages of some parts that are made in Ukraine, leading to the suspension of output at some factories across Europe. However, those supply blockages appear to be easing.

       “Due to the short-term improvement in the supply situation for components, Volkswagen Sachsen can ramp up production at the Zwickau & Dresden plants next week faster than planned," said a spokesperson for Volkswagen AG, the German car maker. The Zwickau site is the company’s main electric-vehicle factory in Europe.

       The European Central Bank has already lowered its forecast for economic growth in the eurozone this year to 3.7% from 4.2%, assuming that disruptions to energy supplies and confidence prove temporary and that global supply chains aren’t significantly affected.

       MINT PREMIUM See All

       Premium Is RBI’s retail direct scheme a good option for investors?

       Premium The unabated love of retail investors in the equity markets

       Premium Nestle’s pricing power to play rescue act in trying times

       Premium India’s gig economy is setting the agenda in insurance ...

       The bank said that the damage inflicted by Russia’s invasion could be larger. Cuts in Russian supplies of natural gas could cause growth to slow down to between 2.5% and 2.3%, it said.

       Earlier this month, the central bank said it would reduce its purchases of government bonds over the coming three months, and may end them entirely by September to contain a pickup in the annual rate of inflation, which stood at 5.9% in February. Policy makers have stressed they will be flexible in their response to economic developments over coming months, rather than stick to a predetermined path.

       “The current exceptional uncertainty means that we need to be humble about how accurately we can predict the future state of the economy," said Frank Elderson, an ECB rate-setter, in a speech Thursday.

       The ECB said it could raise its key interest rate “some time" after it stops buying bonds, while the Federal Reserve has signaled it is likely to raise its key rate six more times before the end of this year.

       However, Unctad warned that an overly rapid tightening of monetary policy in rich countries could lead to an even sharper slowdown in global growth than it has forecast, and threaten the ability of some developing countries to meet their debt payments. The Geneva-based body said there were few signs that the pickup in inflation is pushing wages sharply higher, and said increased borrowing costs wouldn’t resolve the supply-chain problems that were partly responsible for rising prices.

       “We’re not convinced it will work," said Richard Kozul-Wright, director of Unctad’s globalization division. “You can’t fix those problems by raising interest rates."

       Subscribe to Mint Newsletters

       * Enter a valid email

       * Thank you for subscribing to our newsletter.

       Download the App to get 14 days of unlimited access to Mint Premium absolutely free!