From the end of 2021 to the beginning of 2022, the terms of trade in the euro area deteriorated significantly, based on the terms of trade index calculated by Eurostat. The core reason is that the increase in energy prices caused by the Ukrainian-Russian crisis has significantly affected import prices in the euro area. The sharp rise in energy prices has been accompanied by a marked increase in energy price volatility, which magnifies volatility in the cost of importing goods and services in the euro area. Import prices in the euro zone rose sharply, and the strong dollar in the first half of the year led to a widening deficit in energy projects, and the income effect began to turn from positive to negative. According to ECB calculations, the negative income effect from the transfer of purchasing power will account for about 1.3 percentage points of euro area GDP in the fourth quarter of 2021.
The Eurozone’s higher dependence on energy imports leads to a relatively more rapid deterioration in its terms of trade compared to the US and the UK, which exacerbates the negative income effect in the Eurozone. The impact of energy price volatility on eurozone GDP growth in 2022 is further projected. Specifically, while the revenue loss due to higher import costs is partly compensated by eurozone firms charging higher export prices to their global customers, the high volatility of energy import prices leads to a shift in purchasing power from the eurozone to the rest of the world, and a decline in import revenues (negative revenue effect) will drag down eurozone GDP by 2.1 percentage points in 2022. The negative income effect of deteriorating terms of trade is one of the important factors for the continued weakness of the euro in the medium to long term.