The euro zone is forecast to hit just above zero growth in the second quarter, but economists expect the bloc’s economy to steadily deteriorate over the next year as recession risks loom.
Eurostat’s first estimate of gross domestic product for the second quarter, released on Friday, is expected to show quarter-on-quarter growth of 0.1 percent, according to a Reuters poll. That represents a sharp deterioration from 0.6 percent growth in the previous three months and would be the weakest performance since a surge in coronavirus infections and restrictions dragged the bloc into a brief recession in early 2021.
Russia’s invasion of Ukraine in February has pushed up energy and food prices, eroded consumers’ purchasing power and triggered an energy crisis that will leave manufacturers and homes short of gas for the coming winter. Political instability in Italy ahead of September’s election is adding to concerns about the bloc’s prospects.
“It’s like watching a car accident unfold, a creeping crisis,” said Katharina Utermöhl, senior European economist at German insurer Allianz. “Unlike in the pandemic, a significant recovery is unlikely next year.”
A ray of hope is tourism and hospitality. The eurozone economy is likely to get a boost as more people take advantage of the reduced coronavirus restrictions to go on holiday or eat out this summer as they spend some of the extra money they saved during the pandemic to have.
But that push is likely to be dampened by growing household anxiety about the higher cost of living. Most eurozone consumers are feeling the pinch because their wages have not kept pace with inflation, which is now at a record high of 8.6 percent, leaving them worse off.
“We forecast only a small boost to growth from tourism, travel and accommodation this summer as real income tightening gathers momentum and dampens consumer discretionary spending,” said Veronika Roharova, Head of Developed Europe Economics at Credit Suisse.
Russian energy giant Gazprom said this week that flows through its main pipeline Nord Stream 1 to Germany have been halved to about a fifth of their normal levels since Wednesday due to maintenance work, raising concerns Moscow is arming energy supplies to Europe. European gas prices rose 30 percent in the first two days of this week. They have increased ninefold in the past year.
A continued reduction in Russian gas flows to Europe could leave the region unable to fill its storage facilities sufficiently ahead of this winter’s heating season, forcing supplies to heavy industry to be rationed.
A complete halt to flows “could force energy rationing, affecting large industrial sectors and sharply reducing euro area growth in 2022 and 2023,” the IMF warned on Tuesday as it revised its forecast for German growth next year by 1. Downgraded 9 percentage points to 0.8 percent, the largest downgrade of any country. Barring a shutdown, the fund expects the eurozone to grow 2.6 percent this year and 1.2 percent next year.
The EU has set the target for most countries to reduce gas consumption by 15 percent. The federal government this week urged households and businesses to save even more, and Berlin plans to let energy companies pass on 90 percent of their higher costs to customers. “We are in a serious situation,” said Economics Minister Robert Habeck. “It’s about time everyone understood that.”
Government measures to lower fuel, electricity and public transport prices may have kept inflation in check. But consumer prices are likely to have risen to a new Eurozone record of 8.7 percent in July, according to Eurostat figures released on Friday.
Higher prices were blamed for a series of gloomy economic data. These include the first contraction in euro-zone business activity in 17 months, according to the latest S&P Global survey of purchasing managers, and the fall in German business confidence to a two-year low, measured by the monthly Ifo think tank survey.
Meanwhile, consumer confidence fell to a record low this month, according to the European Commission’s monthly survey.
Banks are also tightening the supply of credit to euro-zone households and businesses – a trend likely to accelerate after the European Central Bank last week hiked interest rates for the first time in over a decade.
The deteriorating outlook has already led investors to bet that the ECB will end rate hikes much sooner than they expected just a few months ago.
The yield on 10-year German bonds – a benchmark for euro-zone interest rates – fell below 1 percent on Tuesday for the first time since May, after falling from last month’s eight-year high of 1.77 percent.
“The window for the ECB to hike rates further is closing as the economy weakens,” said Spyros Andreopoulos, senior European economist at French bank BNP Paribas.
The nightmare scenario for the ECB and governments alike would be stagflation, with a disruption in Russian gas supplies sending the eurozone into recession, while the energy crisis and a weaker euro would continue to push prices higher.
Recommended
On Wednesday, Goldman Sachs lowered its forecast for the region, saying a technical recession with two straight quarters of negative growth this year is now more likely than not, even if Russia doesn’t completely shut off energy supplies. A more severe downturn is likely “in the event of an even more severe disruption to gas flows, a renewed bout of government stress, or a US recession.”
Credit Suisse’s Roharova predicted that euro-zone GDP would fall between 1 and 2 percent next year if Russian gas were shut off, while inflation would remain well above the ECB’s 2 percent target for at least another year. “It’s possible that inflation will remain elevated or fall only gradually, even as growth slows,” she said.
Comments are closed.