The eurozone is expected to break fractionally above zero in the second quarter, but economists expect a steady deterioration in the bloc’s economy over the coming year as recession risks loom.
Eurostat’s first estimate of gross domestic product for the second quarter, released Friday, is expected to grow 0.1 percent from the previous quarter, according to a Reuters poll. That marks a sharp deterioration from 0.6 percent growth in the past three months and would be the weakest performance since a spate of coronavirus infections and restrictions dragged the bloc into a short recession in early 2021.
Russia’s invasion of Ukraine in February has sent energy and food prices soaring, eroding consumers’ purchasing power and threatening to unleash an energy crisis that will leave manufacturers and households running out of gas over the coming winter. The political instability in Italy ahead of the September elections is fueling concerns about the bloc’s prospects.
“It’s like watching a car accident in the making, a slow crisis,” said Katharina Utermöhl, senior European economist at German insurer Allianz. “Unlike the pandemic, there is unlikely to be a clear recovery next year.”
One bright spot is tourism and hospitality. The eurozone’s economy is likely to receive a boost as more people take advantage of the eased coronavirus restrictions to go on vacation or eat out at restaurants this summer, as they spend some of the extra money they’ve saved during the pandemic.
But this boost is likely to be dampened by growing household concerns about the higher cost of living. Most eurozone consumers feel the bottleneck as their wages have failed to keep pace with inflation, now at a record high of 8.6 percent, leaving them worse off.
“We forecast only a small boost to tourism, travel and accommodation this summer as real income tightness intensifies, reducing consumer discretionary spending,” said Veronika Roharova, head of economics for developed Europe at Credit Suisse.
Russian energy conglomerate Gazprom said this week that power through its main Nord Stream 1 pipeline to Germany has halved to about a fifth of normal levels as of Wednesday due to maintenance, raising concerns that Moscow is arming energy supplies to Europe. European gas prices rose by 30 percent in the first two days of this week. They have increased tenfold in the past year.
A prolonged reduction in Russian gas flows to Europe could prevent the region from filling its storage facilities enough for this winter’s heating season, forcing stocks to be rationed for heavy industrial users.
A complete shutdown of flows “could force energy rationing, affecting major industrial sectors, and sharply slowing growth in the eurozone in 2022 and 2023,” the IMF warned on Tuesday when it revised its forecast for German growth to drop by 1 next year. 9 percentage points fell to 0.8 percent, the largest write-down of any country. Without closing, the fund expects the eurozone to grow by 2.6 percent this year and 1.2 percent next year.
The EU has set a target for most countries to reduce gas consumption by 15 percent. The German 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 Robert Habeck, Germany’s economy minister. “It’s time for everyone to understand that.”
Government measures to lower prices for fuel, electricity and public transport have likely kept inflation in check. But consumer prices are still expected to rise to a new record high in the eurozone of 8.7 percent in July, Eurostat figures released Friday show.
Higher prices are responsible for a range of bleak economic data. These include the first decline in Eurozone activity in 17 months, as shown by the latest survey of purchasing managers from S&P Global, and the decline in German business confidence to a two-year low, as measured by the Ifo’s monthly survey. -thinktank.
Meanwhile, consumer confidence fell to an all-time low this month, according to the European Commission’s monthly survey.
Banks are also putting pressure on lending to eurozone households and businesses – a trend that is likely to accelerate after the European Central Bank raised interest rates for the first time in more than a decade last week.
The deteriorating outlook has already led investors to bet that the ECB will stop raising interest rates much sooner than they expected a few months ago.
German 10-year bond yields — a benchmark for euro-zone interest rates — fell below 1 percent for the first time since May on Tuesday, after falling from last month’s eight-year high of 1.77 percent.
“The ECB’s chance of continuing to raise interest rates is diminishing as the economy weakens,” said Spyros Andreopoulos, senior European economist at French bank BNP Paribas.
The nightmare scenario for both the ECB and governments would be stagflation, with a disruption in Russia’s gas supply pushing the eurozone into recession, while the energy crisis and a weaker euro push prices even further.
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On Wednesday, Goldman Sachs lowered its forecast for the region, saying a technical recession from two consecutive quarters of negative growth this year was now more likely than not, even if Russia didn’t cut off all energy supplies. A sharper downturn was likely “in the event of an even more severe disruption to gas flows, a renewed period of sovereign stress, or a US recession”.
Credit Suisse’s Roharova predicted that the eurozone’s GDP would fall between 1 and 2 percent next year if Russian gas were cut, while inflation would remain well above the ECB’s 2 percent target for at least another year. “Inflation may remain high or only fall gradually, even if growth slows,” she said.