Where the situation was going to balance after the shock suffered by the companies from the COVID pandemic, came the Russian invasion of Ukraine to question the prospects and create significant negative risks. The contacts of the European Central Bank (ECB) with representatives of 67 leading companies operating in the euro area between 20 and 30 March 2022 highlight the uncertainty that prevails in the business world. Most company representatives said it was still difficult to hire staff. In the short term, according to the survey, the conflict in Ukraine is likely to have a limited impact on labor supply and demand.
Companies that were forced to cut production due to rising energy costs laid off workers or reduced the use of temporary labor. However, it is noted that the difficulty of re-employment is likely to make companies reluctant to lay off permanent staff. The contacts made by the ECB with representatives of the business world showed that there is pressure for wage increases due to the high level of inflation.
Most of the ECB contacts with business representatives described a very dynamic pricing environment in the first months of the year, due to rising commodity prices. At the same time, the study notes, the conflict in Ukraine has now caused further cost pressures and extreme instability in prices not only of gas and electricity but also of many commodities (especially metals, wood, oil and food). The environment for the passing on of rising costs to prices remained very favorable in most sectors, the survey said, as business customers became more familiar with price increases, while there was greater resistance to price increases by consumers.
From most contacts between the ECB and entrepreneurs, the conclusion is that rising inflation will curb consumer spending and both uncertainty and rising costs will have an impact on business investment in the coming quarters. However, according to the research, the representatives of the business world tended to anticipate a slowdown and not a sudden contraction of the activity, while at the same time they emphasize the huge uncertainty and the significant downside risks if the conflict escalates.
Some entrepreneurs cited broader changes in consumer behavior, such as shifting households to cheaper items, reducing vehicle use or postponing business orders, as early signs of a more widespread impact on demand. It is worth noting that a poll by the European Central Bank showed that the Eurozone economy is experiencing slower economic growth and higher inflation, as Russia's invasion of Ukraine increases costs.