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The risk of stagflation increases in the European Union with the war and Portugal among the most vulnerable

The risk of stagflation increases in the European Union with the war and Portugal among the most vulnerable

Financial rating agency Moody’s warned this Tuesday that the war in Ukraine was raising 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 exacerbated underlying supply and demand problems and pushed inflation to levels not seen in the European Union since the mid-1980s,” Moody’s Heiko Peters, a senior analyst at Moody’s, said in a document released today.

Similarly, the analyst notes that Russia’s suspension of natural gas supplies “will likely intensify these pressures, weaken economic activity and increase the risks of a stagflationary environment.”

Stagflation, i.e. stagnation or stagflation with rising inflation, will result from the EU’s economic growth forecast of 2.5% in 2022 and 1.3% in 2023, along with decelerating inflation, which Moody’s expects to be 6.8% this year and 4.4% next.

However, changes in regional and international demand and supply, along with structural changes, “such as the transition of EU countries from Russian energy imports, have increased the risks.”

However, for stagflation to occur, Moody’s notes that price dynamics must be dampened by factors “such as prolonged high energy prices”, noting that fiscal and monetary policies focused solely on growth “could also increase the risks of a stagflationary scenario”. stagflation.

Moody’s also warned of the exposure of southern Europe to this phenomenon.

“Based on a number of indicators pointing to differences in inflation exposure, significantly lower growth and responsive policies, we see southern Europe as more vulnerable to a stagflation scenario,” the rating agency says.

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They noted that “the countries most likely to see this temporary increase in prices become permanent and have fewer political resources are Malta, Cyprus, Portugal, Slovenia and Croatia.”

Portugal has been named by Moody’s as the seventh most inflation-prone country and 20th in the ranking of political resources among the 27th.