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Talks of a looming stagflation in the European Union have intensified over the past month as the region suffers from what many describe as the worst conflict in the continent in decades, threatening skyrocketing inflation, supply shortages, job losses and famine.

Worst economic shock since WWII

Even before the Ukraine invasion began, European countries had already suffered the worst economic shock since World War II in 2020 when the disruptions caused by the COVID-19 pandemic led to a 6.4% drop in the EU’s real GDP. That was worse than the GDP drop during the global financial crisis.

The EU region rebounded in 2021, posting 14.09 trillion euros in GDP, up 5.3% from pandemic-hit 2020.

However, just as the EU’s economic recovery was gathering pace, the region could now plunge into recession, or worse a stagflation — a period of high inflation, elevated unemployment, and slow economic growth rate — as the region is caught in between the Russia-Ukraine conflict.

EU GDP growth

Worsening diesel shortage sparks rationing concerns

As the Ukraine invasion drags on, the global oil trade remains in disarray as sanctions against Russia have prevented it from selling crude to some of its overseas customers. Although oil prices have fallen in recent days due to upbeat developments surrounding peace talks between the two warring countries, oil prices remain high as the absence of Russian crude continues to be felt in global markets.

This sparked concerns of rationing in many markets, particularly in Europe, the top buyer of Russian oil, as many European leaders have scoffed at Vladimir Putin’s demand to pay for natural gas and oil in rubles.

"Governments have a very clear understanding that there is a clear link between diesel and GDP, because almost everything that goes into and out of a factory goes using diesel,” John Cooper, director general of Fuels Europe, a unit of the European Petroleum Refiners Association, was quoted by Reuters as saying.

Germany, Poland, Turkey, Britain, France and Spain are the countries that are most dependent on Russian diesel, the news outlet added, citing data from energy consultancy FGE.

Worst global food crisis since WWII

In addition to the shortage of oil, the Ukraine war has also exacerbated the global food shortage at a time when many countries are already struggling with poverty and hunger during the COVID-19 pandemic.

David Beasley, executive director of the UN World Food Program, on Tuesday warned that the war in Ukraine has led to “a catastrophe on top of a catastrophe,” that "will have a global impact beyond anything we’ve seen since World War II.”

In February, global food prices jumped to an all-time high, according to the FAO Food Price Index. Beasley said high prices mean more people globally will fall into hunger.

Pandemic’s impact on EU labor markets

Employment levels in the EU have declined since the start of the pandemic, while the total hours worked also slumped reflecting supply and demand factors, according to a recent report by the International Monetary Fund.

As economies reopened prior to the war, labor markets have recovered from the pandemic-induced slump, with the EU unemployment rate shrinking to a historical low of 6.8% in December 2021, the IMF noted.

However, as inflation continues to soar, wages will likely follow the trend, prompting more rate hikes by central banks.

EU unemployment

Playing down stagflation concerns

Against the many signs that point to a possible stagflation in the EU in the near term, Christine Lagarde, chief of the European Central Bank, said in a Wednesday conference that no data suggests Europe will fall into stagflation.

Although inflation will “no doubt” increase this year, conditions remain “quite fluid,” Lagarde was quoted by the Associated Press as saying.

Time to broaden your investments: Trade euros, energy, and food commodities

The nickel market has been in disarray in recent weeks as prices soared to unprecedented levels before going on a freefall amid supply concerns and an unexpected short-squeeze by one of the world’s largest steelmakers.

Nickel is one of the most common metal elements in the world used to make stainless steel, batteries, coins, and other metal applications.

How the Russia-Ukraine conflict drove nickel prices higher

Russia is one of the world’s largest producers of nickel, supplying about 20% of class 1 nickel that is mainly used in the production of stainless steel and electric vehicle batteries. Data from market research firm Statista showed that Russia was the world’s leading exporter of nickel and nickel products in 2020, shipping about $3.02 billion worth of the commodity.

The conflict between Russia and Ukraine sparked fears of a nickel supply crunch as Russia has been hit with a number of economic sanctions and as importers of other Russian commodities like oil avoid being impacted by sanctions.

The short-squeeze that sent prices skyrocketing

In addition to the supply concerns induced by the ongoing Ukraine conflict, a short-squeeze involving Tsingshan Holding Group, touted as the largest nickel producer in the world, was also behind soaring nickel prices.

The Chinese company took a nickel short position of 200,000 tons of nickel in the London Metal Exchange (LME) and as the price of nickel surged in the early days of the Ukraine crisis, the company’s short position was left in disarray, setting it up for a paper loss of about $8 billion.

Tsingshan recently inked a deal with banks to avoid further margin calls, buying it time to cut its nickel position as markets stabilize.

LME forced to halt trading

The short-squeeze and supply concerns sent nickel prices skyrocketing by more than 50% to $100,000 per tonne on March 8, significantly up from about $25,000 per tonne a week earlier.

The surge prompted the LME to suspend nickel trading and impose price limits to maintain stability.

Since the trade resumption, prices have been on a freefall over low trading volumes and concerns about the status of Tsingshan’s short position. The benchmark three-month nickel on the LME fell 2.2% on Tuesday at 10:30 a.m. GMT to $32,000 per tonne.

Nickel D1

What the volatility in nickel prices could mean for EV makers

Higher nickel prices could drive up the costs of electric vehicles even higher as nickel is one of the key materials used to produce EV batteries. Morgan Stanley auto analyst Adam Jonas had recently warned that EVs in the US could be $1,000 more expensive as nickel prices soar.

This could hurt electric carmakers’ profit margins and impede the growth of the burgeoning EV market at a time when markets like China, Europe, and the US transition to new-energy vehicles.

The shortage in nickel and skyrocketing prices of the metal have forced some EV makers like Tesla (NASDAQ:TSLA) to look for other battery materials. In late February, Tesla CEO Elon Musk tweeted that the Silicon Valley-based company’s biggest concern for scaling lithium-ion cell production is nickel.

“That’s why we are shifting standard range cars to an iron cathode,” Musk said. Tesla recently hiked the prices of its Model 3 and Model Y cars in the US and China, the world’s biggest car market, due to high raw material prices.

Its rivals in China including XPeng (NYSE:XPEV), Li Auto (NASDAQ:LI) and BYD (HKG:1211) also announced price hikes to counter rising raw material costs. However, NIO (NYSE:NIO), another local player, last week said it has no plans to raise prices at the moment after its sales have lagged behind its rivals XPeng and Li Auto for five straight months.

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