The European economy has had a particularly rough ride this year as the Russia-Ukraine conflict that erupted in February pushed up energy prices, increased euro-zone inflation, depressed household incomes and weakened consumer confidence.
Driven by energy and food prices, annual inflation in the euro area rose to 10.6 percent in October. In November, the number dropped to 10 percent.
In July, the European Central Bank raised interest rates by 0.5 percentage points for the first time in 11 years to fight inflation, followed by two consecutive hikes of 0.7 percentage points in September and November to 1.5 percent. Last week it raised interest rates by another half a percentage point to 2 percent.
Last month, eurozone inflation fell to 10 percent for the first time in 17 months. Economists say that while that figure was encouraging, it’s far too early to claim victory.
John Beirne, deputy head of research at the Asian Development Bank Institute think tank and a former European Central Bank economist, said: “Inflation slowed more than expected in November, reflecting lower energy prices due to some easing due to energy supply shortages and a weaker demand, food price inflation continued to rise.
“However, core inflation, which excludes energy and food, has remained steady at 5 percent and the near-term inflation outlook remains very fragile.”
There has been some easing of energy supply constraints and a moderation in energy demand given the warmer than expected weather. However, Beirne said: “Uncertainty remains as to whether recent developments reflect a turning point in the inflation outlook as supply shortages could recur.”
Last month’s data gives hope that the biggest price surge in a generation has peaked.
Carsten Brzeski, chief eurozone economist at ING Bank, said: “It’s too early to give the all-clear signal, but we’re definitely close to the peak, unless energy prices pick up again next year.
“However, in the coming months we will still see higher wholesale gas prices being passed on to consumers, which could also temporarily boost inflation. The energy price crisis has peaked, but not the energy supply crisis. And a peak doesn’t automatically mean that things get much better from here. We could also run on a plateau for some time.”
Ricardo Amaro, Senior Eurozone Economist at Oxford Economics, echoed this view, saying: “The first drop in eurozone inflation in 17 months is certainly welcome news. But the details dampen the optimism a bit as the decline was solely driven by energy inflation, which remains very volatile.”
Oxford Economics forecasts inflation to moderate over the next year, supported by strong disinflationary momentum in energy and food prices, with industrial goods also likely to contribute to lower inflation.
“Nevertheless, inflation remains very high for much of the year, averaging 5 percent in 2023, and we believe inflation may not fall back below the ECB’s 2 percent target until late 2023.”
While headline inflation has slowed over the past month, core inflation, which excludes volatile food and fuel prices, remained unchanged at 5 percent.
“Hard Winter”
Michel Ruimy, Economist and Associate Professor at the ESCP Business School in Paris, said: “Even taking into account core inflation, the conclusion is clear: inflation, by reducing people’s purchasing power, has weakened European households, with concrete consequences for their daily lives . It’s going to be a tough winter for some people in the eurozone.”
Europe’s economic woes have caused the currency to slide, with the euro falling below par with the dollar in August and September, falling to a 20-year low.
Experts say the euro’s recent weakening was the result of several factors, including the exit from the pandemic, the Russia-Ukraine conflict, inflation, the energy crisis and especially the gas crisis, which have made the dollar a haven.
“All of these factors, along with sanctions imposed on Russia by European countries, are weighing on confidence and slowing growth in the euro zone,” Ruimy said. “The euro will then be less popular.”
Given the heightened uncertainty and high pressure on energy prices, the contraction in economic activity is expected to continue in the first quarter of next year, according to the European Commission’s autumn forecast.
It forecasts overall GDP growth of 0.3 percent for the coming year in both the European Union and the euro zone. Economic growth is expected to pick up speed by 2024 and average 1.6 percent in the EU and 1.5 percent in the euro area.
Source: China Daily
Comments are closed.