With record rate hikes (350 basis points) since autumn 2022, ECB has faced up to the inflation problem in the euro area. Further hikes, with some uncertainty about the extent, are set. This should put ECB in good competition with the German Bundesbank of the 1970s. This makes sense in view of the still tense inflation outlook. To catch up with Bundesbank on a one-to-one basis, there is still way to go in terms of interest rate hikes. This raises the question: How many more interest rate hikes does ECB have the courage to implement?
European banks fell under scrutiny as the collapse of SVB and Credit Suisse posed questions if we are in a systemic crisis. Our answer to this is “no”, at least for now, which is based on the sector’s ample liquidity, solid capital position and refinancing options at the ECB. CEE banks benefit from a stickier deposit base and, on average, lower exposure to other potentially problematic topics (e.g. real estate activities). This, however, does not help their "penalty" on the international debt market, where geopolitical risks still reign supreme. Fundamentally, the sector is facing moderation of profitability amid growing pressures on the cost side (funding, credit risk, opex, special taxes), but we see it as well-placed to traverse a more complex geopolitical & global/European banking landscape.
As the war extends into the second year with no sign of abating, we see the West as strongly committed to support Ukraine at least in the near term, which should be adding to the resilience of Ukraine's economy. Russia is doing better than expected with seemingly still limited economic impact from sanctions, however the pressures will continue to ratchet up to undermine the longer-term financial and economic capacity.
In addition to humanitarian hardship, the war in Ukraine brought profound change to the economic outlook for Ukraine plus Europe. Currently, we would estimate direct economic losses of at least ~2.000 EUR bn for Europe plus additional EUR 600-1.000 bn in Ukraine. Moreover, the Ukraine war reinforces geo-economic trends, incl. the quest for resilience that the pandemic has triggered. With 12 months of war behind us, the level of economic uncertainty remains elevated. Both the euro area and CE/SEE are now in a stagflation environment with record high inflation rates in CE/SEE plus increasing risks of a wage-price spiral.
The direct and indirect economic damage caused by the war in Ukraine is immense. Even if the conflict ends in 2023, it could take until 2029 for the country's GDP to return to a (hypothetical) non-war path. Of course, such a scenario would require front-loaded substantial public and private/banking sector investments plus funding in the amount of EUR 600-750 billion (on top of macrofinancial assistance and military or humanitarian aid). The EU integration process could have a useful flanking effect in this regard.