Europe’s economy grew surprisingly last quarter, easing recession fears (for now)

Latest / July 30, 2022 / Admin / 0

The European Union economy recorded seasonally adjusted growth of 4% in the last quarter compared to the same quarter a year ago and 0.6% compared to the first quarter, according to a preliminary estimate published on Friday by the EU Statistical Office. The 19 countries that use the euro as their currency — which account for almost a fifth of global economic output — grew somewhat faster, at 4% and 0.7% respectively.

But Germany, the region’s largest economy, stagnated in the second quarter, official data showed on Friday.

Inflation continued to rise. Consumer prices in the euro zone rose to 8.9% in July, up slightly from the previous month, according to preliminary data from Eurostat.

The news comes a day after the United States announced that its economy had contracted for the second straight quarter, fueling recession fears.

For months, soaring global energy and food prices have put a strain on European consumers and businesses. Russia’s invasion of Ukraine in late February and subsequent sanctions only worsened the situation, creating shortages of basic commodities.

Last week, the European Central Bank raised its main interest rate by half a percentage point – its first increase in 11 years – in a bid to limit the price spike. But he still faces an uphill battle to get the situation under control.

Despite Friday’s data, a recession in Europe is still looming as it faces the prospect of a widespread energy crisis this winter.

The central bank is lagging peers like the Federal Reserve, which started climbing months ago. Interest rates in Europe have been negative since 2014, which means it is even further behind. And, if an energy shortage tips the region into recession, the central bank could be forced to halt rate hikes abruptly, hampering its ability to continue fighting inflation.

If a recession were to occur, inflation could subside without requiring much additional central bank intervention. But economists are hardly rooting for the outcome, which would also usher in a wave of job losses.

A survey of European fund managers by Bank of America released last week found that 86% of respondents expect a recession in the next year, down from 54% in June.

energy crisis

The chances of a recession in Europe rose earlier this week when Russia – historically its biggest energy supplier — cutting natural gas deliveries through a key pipeline.

The continent has been grappling with supply shortages for months amid an escalating economic dispute between Moscow and Brussels over the war in Ukraine.

The result was a spike in energy prices that stoked inflation and nearly bankrupted Germany’s largest gas importer last week.

Last month, Gazprom, the Russian energy company, cut flows through the Nord Stream 1 pipeline by two-thirds. Flux Nord 1 accounted for around 35% of total Russian gas imports to Europe last year.

The company again reduced deliveries to just 20% of pipeline capacity last week, citing maintenance work.

Overall, the flow of Russian gas to Europe is less than a third of what it was this time last year, the European Commission said last week.

It is therefore a matter of rushing to find other sources of gas, to increase production in Norway and to raid the stocks of liquefied natural gas.

Europe has already managed to cut Russia’s share of its gas supply from 40% last year to just 20% in June, according to economic think tank Bruegel.

But if Moscow were to cut its exports to the bloc entirely, as it has done to several EU countries in recent months, many economies would tip into recession.

Anticipating the worst, the European Commission last week unveiled its emergency gas conservation plan for next winter.

The International Monetary Fund said last week that a complete shutdown of Russian gas could reduce the GDP of Hungary, Slovakia and the Czech Republic – countries particularly dependent on Moscow’s exports – by up to 6%.

Germany, the bloc’s largest economy, could lose 220 billion euros ($225 billion) over the next two years in such an event, according to its leading economic forecasters.

ease recession fears (for now) - CNN, economy, The European economy experienced surprising growth in the last quarter