EBRD: Shipping disruptions could further fuel inflation

Talking to Euronews Business at the World Economic Forum (WEF) in Davos, Beata Javorcik said, though headline inflation has declined, “fighting core inflation [ed: excluding food and energy prices] is a lengthy and more painful process.”

She also added, that the ongoing shipping disruptions in the Red Sea due to Yemeni Houthi attacks could potentially continue inflaming prices this year.

Several shipping companies such as Maersk, the Mediterranean Shipping Company (MSC) and Hapag-Lloyd have already paused trips through the Red Sea and Suez Canal. Alternative routes include going around the African continent, adding significant travel time and costs.

The longer waiting time and increased costs for materials may have a knock-on effect on the prices of final goods, with energy prices possibly being most impacted. Down the line, this could potentially erode the progress made in taming inflation so far, instead fuelling consumer prices more.

How are central banks planning to deal with inflation in 2024?

Headline inflation has gone down considerably in several major economies over the past few months, mainly due to agricultural, natural gas and energy prices returning to pre-Ukrainian war levels. 

However, Javorcik notes that “central banks continue to be very cautious. They don’t want to prematurely declare victory over inflation.” This is mainly due to most countries’ inflation still being quite a bit above the generally accepted target of 2%. 

Aligning with the EBRD’s Chief economist’s words, the European Central Bank’s (ECB) Governing Council member Robert Holzmann hinted on Monday that the central bank may defy market expectations entirely and hold off on starting interest rate cuts during the whole of 2024.

Volatility in commodity markets could return

Back in February 2022, at the beginning of the Russia-Ukraine conflict, several commodities saw increased volatility and soaring prices, translating to higher inflation for the global economy. These included oil, gas, coal, wheat, maize and metals such as gold, silver and palladium. 

At the time, after cutting down on Russian gas, Europe was heavily reliant on the US for liquefied natural gas (LNG) supplies. However, this year, the bloc is likely to be much better equipped, said Javorcik, with reserves of natural gas being practically full at the start of winter 2023/2024.

AI progress may threaten election processes

Adding to the mix, the rapid advancements in artificial intelligence are also a key theme of the WEF this year, along with being a potential risk for several upcoming elections across the globe in 2024, Javorcik warned.

This is due to several AI-powered misinformation campaigns already being launched by numerous players spanning individuals, corporates and governments. This includes deepfake images, as well as attempts to manipulate markets.

As Javorcik highlights, “I think the most immediate concern about AI is this is a year where 70 countries have important elections. So I think most observers recognise the possibility of AI being used to interfere with elections through misinformation.”

Perspectives on European economies in 2024

Javorcik said that the European economy is likely to be better positioned this year than last year, but difficulties remain.

“This year is going to be better than last year in economic terms for Europe, but it still remains challenging,” said the chief economist.

“We have to remember that the prices of natural gas in Europe remain five times as high as in the US, and this is eroding European competitiveness,” she said. Deindustrialisation also remains a very potent threat to the European economy.

Other global threats include soaring interest rates and the high costs of government borrowing, with investors wanting higher compensation for ongoing geopolitical risks.

For the EBRD, one of the main priorities of the coming year will include advancing the green transition in Europe, with more than 50% of investments in the past year having gone towards the green economy.

Video editor • Joanna Adhem