Summer tourism lights up eurozone economy but cost of living crisis casts shadow

Perched on a cliff on the Amalfi Coast, overlooking the azure waters of the Mediterranean, Hotel San Pietro Positano is having its best year ever as pandemic-weary travelers, especially Americans, flock to Italy.

The hotel, charging an average rate of €1,800 per night for a room this summer, has noticed a takeover in April and is fully booked until mid-October. “For two years no one could come,” said co-owner Vito Cinque. “Now everyone does.”

The euro zone’s tourism boom, helped by the single currency’s fall against the dollar, is a bright spot in a region that economists increasingly fear will slide into recession in the second half of this year.

Figures released on Friday showed the currency zone’s economy grew 0.7% between the first and second quarters, a stronger result than the 0.1% expected by economists and a stark contrast to the numbers of US gross domestic product for the same period, which showed the world’s largest economy contracted for the second straight quarter.

France, Italy and Spain all recorded better-than-expected numbers as visitors flocking to Mediterranean destinations and enjoying city breaks helped offset the impact of rising energy bills and food prices on domestic demand.

Mohamed Ichem, who sells macaroons at Ladurée near the Tuileries Gardens in Paris, said most of his customers are English-speaking. “Tourists spend lavishly,” Ichem said. “My biggest order was eight boxes of 54, for over €1,000.”

Adama Touré, who runs Le Castiglione – a brasserie a few minutes from the Ritz hotel in the French capital’s chic Place Vendôme, said: ‘Americans are having fun in every way. . . I just served a plate of caviar to a group of them.

Ignacio de la Torre, chief economist at asset manager Arcano, calculated that around a third of Spanish growth in the second quarter – which came in at 1.1%, compared to just 0.2% over the first three months of the year – was driven by tourism. .

María Frontera, president of the association of hoteliers on the Spanish holiday island of Mallorca, said the occupancy rate reached 93% this month, five percentage points higher than in July 2019, l summer before the pandemic started. “We expect similar levels in August and fall demand continues to increase,” she said.

But by the time the weather cools, European businesses and consumers will face increased economic pressure. The war in Ukraine has left factories in the region, barely recovering from the pandemic, facing new supply chain challenges. Germany’s economy, more reliant on manufacturing, stagnated in the second quarter, missing analysts’ expectations of mild expansion and underscoring how dire the situation is for northern economies that can rely less on hospitality.

Russia’s invasion and doubts over Moscow’s willingness to keep gas flowing to Europe have sparked a spike in household energy costs, which have risen 40% in the past 12 months, while food costs rose 10% over the same period, leading to the worst cost of living crisis in decades.

Marina Lalli, president of the Italian National Federation of Travel and Tourism Industries, said resorts aimed at more ordinary Italian families were under pressure. “People are struggling to pay for utilities, fuel for their cars and food prices have also increased. [Italians] decide either not to go on vacation at all – or, instead of staying 10 days, they stay a week, or only three days.

Confidence figures released last week by Eurostat, the European Commission’s statistics office, show consumers are more reluctant to make big purchases than at any time since the early months of the pandemic.

This pessimism is unlikely to stop the European Central Bank from raising rates further in the fall, after making their first hike in decades when it raised the benchmark deposit rate from 50 basis points to zero. end of July.

“We expect the ECB to raise [the rate] an additional 100 basis points by the end of the year to help prevent any rise in inflation expectations as inflation rises further over the coming months,” said Berenberg Bank economist Holger Schmieding. .

Overall, eurozone inflation hit a new high of 8.9% in the year to July, according to figures released Friday by Eurostat, the statistics office of the European Commission. Even the basic measure, which eliminates soaring food and energy prices, rose 4%, more than double the ECB’s 2% target.

As interest rates rise and tourists return home, economists expect growth numbers to deteriorate, especially if tensions with Moscow escalate. Russian energy company Gazprom has reduced flows from its Nord Stream 1 gas pipeline, which runs under the Baltic Sea to Europe’s biggest economy, to just 20% of capacity – levels which, if maintained, would trigger a deep recession in Europe.

“This quarter brings good news, but doesn’t tell us much about the underlying health of the economy,” said Gilles Moëc, chief economist at French insurer Axa. “What happens after the summer is over?