The US continues to strike Iran, causing oil prices to soar again and raising fears of a recession in Europe. How does the war affect Bulgaria and how long will prices rise?
The Strait of Hormuz has been closed for almost three months, and the whole world is paying the price. The rise in the prices of oil, gas, fertilizers and a number of raw materials that were transported through the Persian Gulf led to an increase in the cost of transport, logistics and production.
Members of the International Energy Agency released a record amount of their strategic reserves, some countries reduced excise duties and introduced measures to support citizens and businesses. But unless a lasting truce is reached, the effects will continue to be felt more and more severely in the coming months, experts warn. What does this portend for Europe and Bulgaria?
Fear of recession in Europe is growing
If peace talks fail again and no solution is reached in the coming weeks, fuel markets will enter an even more unstable phase. In the short term, this would lead to a surge in inflation and possibly even an outright shortage of petroleum products - especially for aviation. Over time, however, these challenges could be overshadowed by fears of recession, warns the “Guardian".
Surveys among purchasing managers indicate that business activity in the eurozone is contracting at the fastest pace since October 2023. France recorded the sharpest contraction since the pandemic. “Preliminary data from the May survey show that the eurozone economy is suffering increasingly severe consequences from the war in the Middle East”, commented Chris Williamson, chief economist at S&P Global Market Intelligence.
How is the war affecting Bulgaria?
“Bulgaria is a net importer - raising prices means more costs for business. There is an economic price that must be paid. How it will be distributed is a matter of domestic income policy and the structure of the economy”, commented Lachezar Bogdanov from the Institute for Market Economics (IME). “Income growth is not yet affecting transport and tourism, people are absorbing the high prices. But this does not mean that it has no effect”, he added.
Can the state impose additional measures similar to those in other countries? Bogdanov describes these measures as “redistribution of suffering”. “Other countries are reducing fuel excise taxes, but this means less revenue coming into the state. This means either increasing the deficit and debt, or cutting other expenses”, he explains.
However, high prices can at some point make some businesses uncompetitive, the expert points out. He gives the example of those agricultural producers who use fertilizers. Since the beginning of the war, fertilizer prices have risen by nearly 50%, the Bulgarian Farmers' Union recently complained.
Asia is the most affected, but Europe is losing competitiveness
Europe has not suffered as much as Asia. Nearly 90% of the oil and gas that passed through the Strait of Hormuz before February was directed specifically to the Asian market, as the BBC notes. Some countries like the Philippines have even declared an energy emergency.
"Europe is also a net importer of energy. More expensive raw materials make European industry less competitive", says Lachezar Bogdanov. Large European economies like France and especially Germany have been struggling with production and export problems for years. "There is a risk that domestic consumption will also stop. In these economies, incomes do not grow by 10-15%, like in Bulgaria. When heating and fuel prices rise there, there is less money left for consumption."
How will this affect tourism?
About a third of the aviation fuel that Europe uses comes from the Middle East. Prices have risen, and some companies like "Lufthansa" have cancelled thousands of flights in the coming months, while others have introduced additional charges and raised ticket prices.
"The price increases in tourism are still minimal. But the big impact will be felt if persistently high energy prices push Europe into recession. If the price of your holiday goes up, you can swallow it, but if one member of your household loses a job because European industry is suffering from high energy and raw material prices, you won't go on holiday," says the chief economist at the IME.
Can a truce quickly stabilize the economy?
Despite renewed US strikes on Iran, Secretary of State Marco Rubio said a deal with Tehran was possible within days. Will it mean a quick stabilization of the economy?
"Prices won't fall immediately, but the direction will be clear", Bogdanov commented. "However, if energy prices rise permanently, then questions arise". After the Arab countries imposed an embargo on oil exports in 1973, prices remained high even after it was lifted six months later. "Prices did not return to pre-1973 levels. That is why a period of stagflation followed in Western Europe and especially in the US - there was no growth, high unemployment, and high inflation. This is the big risk for Europe now," he says.
The optimistic and pessimistic scenarios
"The optimistic scenario is the opening of the strait and predictability," Bogdanov comments. Most experts, however, are skeptical that the Iranian regime will stop using the blockade of the Strait of Hormuz as a means of pressure. "If a new government comes to power in Iran tomorrow that wants peace and trade, that would be good," the expert adds. But there are no such prospects for the moment.
"The pessimistic scenario is a larger increase in fuel prices. But there can only be a physical shortage of aviation fuel," he reassures.
How long will prices in Bulgaria rise?
"One of the reasons for rising prices is the growth of incomes - both among pensioners and among workers. There is no unemployment, there is no fear of unemployment," explains the IME expert. "In just one month, banks are giving out one billion euros in new loans. This is new money in the economy, which is flowing into both businesses and households."
According to IME data, wage growth this year will probably outpace price increases. "To prevent this from continuing, either the central bank must cool lending or the new government must cool budget spending. The third option is that if a deep recession occurs in the major economies in Europe, it will drag ours along."
In any case, however, certain goods will continue to rise in price disproportionately. "This is very dependent on both the climate and energy prices. If the gas and electricity bill doubles, someone has to pay it. Besides, if this year the fruit and vegetable picker wants double the wage, it will have to be covered."