Issued on: 29/07/2022 – 13:13
Inflation in European countries using the euro rocketed to a new all-time high in July, boosted by higher energy prices due to Russia’s war in Ukraine, but the economy still managed a better-than-expected second quarter, albeit achieve meager growth.
Annual inflation in the 19 euro-zone countries rose to 8.9% in July, up from 8.6% in June, according to figures released Friday by the European Union’s statistics office.
For months, inflation has been at its highest level since 1997, when the euro began to register, leading the European Central Bank to raise interest rates for the first time in 11 years last week and announcing new momentum in September.
Energy prices rose 39.7% in July, only slightly lower than the previous month due to gas supply concerns. Food, alcohol and tobacco prices rose 9.8%, faster than last month’s rise due to higher transportation costs, shortages and uncertainty about Ukraine’s supply.
“Another ugly inflation reading for July,” said Bert Colijn, senior economist for the eurozone at ING bank, adding that there was “no immediate sign of relief”.
The eurozone economy grew from April to June, growing by 0.7% compared to the previous quarter, despite stagnation in Germany, Europe’s traditional economic engine. France avoided recession fears by posting modest growth of 0.5%, while Italy and Spain exceeded expectations with 1% and 1.1% expansions respectively.
Economists pointed to the tourism recovery after the COVID-19 pandemic, with a shortage of airports and airlines filling up this summer, leading to travel chaos.
With inflation continuing to rise higher than expected, analysts expect economic growth to be the last glimmer of good news, and inflation, rising interest rates and the worsening energy crisis are expected to push the region into recession later this year.
“This is probably as good as it will be for the eurozone in the near future,” Andrew Kenningham, chief economist for Europe at Capital Economics, wrote in an analyst note.
Europe’s growth is in stark contrast to the United States, where the economy has contracted for two quarters in a row, raising fears of a recession with inflation at its 40-year high. But the job market is even stronger than it was before the COVID-19 pandemic, and most economists, including Federal Reserve Chairman Jerome Powell, have said they don’t think the economy is in recession.
However, many increasingly expect an economic downturn in the US to begin later this year or next year, as it did in Europe.
Europe’s risk is largely related to its reliance on Russian energy, with Moscow curbing natural gas flows that power factories, generate electricity and heat homes in the winter.
More cuts this week via a major pipeline to Germany, Nord Stream 1, have fueled fears that the Kremlin may cut off supplies completely. That would force rationing for energy-intensive industries and drive up already record high inflation, driven by rising energy prices, sending the 27-nation bloc into recession.
While European Union governments this week approved a measure to cut gas consumption by 15% and approved tax cuts and subsidies to alleviate a cost of living crisis, Europe is at the mercy of Russia and the weather.
A cold winter, in which demand for natural gas soars, could lower the storage levels that governments are now trying to fill, but made infinitely more difficult by Russia’s austerity measures.
“With gas supplies in the region having declined and inflation set to remain elevated for some time to come, the eurozone is likely to plunge into recession,” Michael Tran, assistant economist at Capital Economics, said in an analysis this week.
While the European Central Bank has begun raising rates to cool inflation, it has followed other central banks like the Fed and the Bank of England by making credit more expensive, fearing the excessive impact of rising energy prices. related to the war.
The effect of the ECB’s recent rate hike on inflation has been “very limited, although it contributes to a further cooling of demand in the eurozone,” ING’s Colijn wrote.
“With a recession looming and inflation reaching new highs, the question is how the ECB will respond to an economy that is already cooling,” he said.
(AP)