The old continent is paying an exorbitant bill for the consequences of the war in Ukraine and its economic repercussions in particular, and what has triggered the crisis of inflationary pressures that Europe is facing.
According to the latest data published by Eurostat (the statistical agency of the European Union) for the first quarter of this year 2023, the euro zone economy shrank by 0.1%, for the second consecutive quarter.
Previous estimates – before the release of the revised data and before Germany (the continent’s largest economy) announced it had entered recession – had pointed to a slight growth of 0.1% in the first quarter.
It is the first time that the eurozone economy has contracted in six months since Corona led to negative growth in the first half of 2020.
A technical recession is usually defined as two consecutive quarters of contraction, while concerns focus on whether or not Eurozone economies are vulnerable to larger crises that lead to a deep recession that will last for a long time.
This comes at a time when the European Central Bank is expected to raise interest rates again next Thursday, in line with its policy to curb inflation, despite the entry of the euro zone into a state of recession.
Analysts are likely to repeat last May’s decision to raise borrowing costs by 25 basis points, bringing the closely watched interest rate to 3.5%. This will be the eighth time in a row that the institution has raised its interest rate since last July, since the beginning of the monetary tightening policy last year.
Positive indicators
In this context, a senior research fellow at the Peterson Institute for International Economics, Jacob Kierkegaard, says in exclusive statements to “Sky News Arabia Economy”: “In my view, there is no chance of a deep recession in Europe during summer.” He reviews a number of indicators on which he relies to confirm his future estimates, among them (the rapid decline in the rate of inflation, in addition to relatively high wages, in addition to the improvement in unemployment indicators ).
Inflation in the euro zone slowed to 6.1% in May, after a peak of 10.6% in October, indicating the impact of the efforts of the European Central Bank. The unemployment rate in the eurozone fell to 6.5% in March.
While the European Central Bank’s 2% inflation target remains elusive, policymakers stressed it was too early to back off on raising interest rates, indicating that rate hikes will continue in the future. the coming months.
Meanwhile, notes Kierkegaard, “Europe’s energy-intensive industry is struggling to adjust to rising energy and carbon prices across the EU, which means manufacturing of the EU will remain stagnant all summer”.
According to the Flash Purchasing Managers’ Index, private sector economic growth in the Eurozone fell to its lowest level in 3 months last month due to the drop in industrial production.
On the other hand, a senior researcher from the Peterson Institute for International Economics believes that while the manufacturing sector has been affected, the services sector as a whole should continue to grow.
“I think the EU will grow around 1% for the whole of 2023, and growth will pick up in the second half,” he concludes.
A report by “Bloomberg” described the recent data linked to the contraction of the euro zone, as a “big blow” for this region, at a time when European Central Bank officials and politicians had pointed to the possibility of avoid economic deflation. According to a report published by the British newspaper “The Telegraph”, Europe could experience a further contraction during the rest of the year.
A number of eurozone countries have recently revealed that they have lowered their first quarter GDP estimates. Ireland recorded a contraction of 4.6%, 2.1% for Lithuania, 0.7% for the Netherlands and 0.3% for Germany.
While a few countries have raised their estimates, including Italy, by 0.6%, compared to previous estimates of 0.5%.
inflationary pressures
Moreover, Elizabeth Carter, an academic specializing in European affairs, assistant professor at the University of New Hampshire, underlines in exclusive statements to “Sky News Arabia Economy” that “it is too early to expect a deep recession this summer”, explaining at the same time that “no There are still inflationary pressures, as well as high interest rates, but this seems more likely to lead to a slowdown in economic growth than to a deep recession”. It depends on avoiding a major external shock that could trigger a deep recession elsewhere in the global economy.
It should be noted that the recession suffered by the Eurozone this winter comes in light of the pressures of high energy prices resulting from the Russian-Ukrainian crisis.
European Central Bank President Christine Lagarde said earlier this month that interest rates this month were “close to the appropriate level” but that “we need to keep raising them.”
According to Bloomberg, the region is expected to return to growth in the current quarter, and the European Commission strengthened its forecast for the region last month, as it currently forecasts GDP growth of 1.1% in 2023 and 1.6% in 2024.
The Academy of European Affairs explains the impact of the current scene on Europeans: “With inflation, the cost of living is rising, and with interest rates rising, loans and lines of credit are become more expensive… I expect most Europeans to make some behavioral adjustments, i.e. vacations may be closer to home or less important than they may be were in the past, the housing market will also calm down, as will the construction sector, but cities will feel this less than other regions”.
She explains that “for most people, the average consumer will make marginal adjustments to their consumption habits, and most of these adjustments will be seen in the FMCG industries (consumers will buy fewer clothes and fewer tools, and they will will try to make the most of the products they currently own).
Although the recession remains moderate, the sudden winter recession is heightening fears that the region has not handled the fallout from the war in Ukraine and Krane as well as it had thought, casting doubt on the more optimistic outlook for 2023.
European mess
Meanwhile, founding director of the University of Victoria’s European Studies Program, Amy Verdon, points out in exclusive statements to “Sky News Arabia Economy” that at the start of the war in Ukraine, all eyes were on Europe and wondered if this war was putting Europe in turmoil. .
And she adds: “In fact, the European Union has had to make significant adjustments in terms of imposing sanctions on Russia and accelerating the energy transition from fossil fuels to more renewable energy sources. The oil and gas prices increased and added to the already existing upward price trend.. It was a negative price spiral for inflation and the cost of living crisis that was happening in many Many countries.
And she continues: “Nevertheless, statistics released by Eurostat last Thursday showed that the recession in the first quarter of this year was only 0.1%…which is a very limited recession…However, the Europe’s largest economy (Germany) also went into recession.” Other countries like Estonia, Greece, Hungary, Lithuania, Malta and the Netherlands have done so.
And she stresses that “the European Central Bank must limit inflation, which is too high (far from the 2% target).. while the main tool available to the European Central Bank is to increase interest rates. However, higher interest rates will also have a negative impact on the economy.
But she thinks there is also good news. Employment has been strong, and spending on summer vacation also looks strong. After the COVID-19 pandemic and concerns over the war in Ukraine in the first year, consumers are now more confident to return to their usual holiday shopping habits.
These negative trends may be offset to some extent by a more optimistic desire among travelers to enjoy the good times, as people put aside negative expectations and fears and enjoy life a bit on summer vacation. summer.
Despite this, she explains that the cost of living crisis is a major problem because the prices of fuel and food are rising faster than the prices of other items. This means that the poorest people are seeing their costs rise faster than the average. It also affects the wealthy to a lesser extent than ordinary citizens. Thus, the cost of living crisis has been the main concern of EU citizens this year.
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