The eurozone economy continues to grow, but the risk of recession threatens

The eurozone’s economy continued to grow at a modest pace in the first three months of the year, but faces the threat of a decline in recession as Russia’s war on Ukraine keeps energy costs high and squeezes household purchasing power.

Restrictions intended to limit the spread of the Omicron variant of Covid-19 weighed on activity at the beginning of the year. This burden eased as the quarter progressed and the euro area economy appeared to be ready for a strong recovery this year.

However, President Vladimir Putin’s invasion of Ukraine in late February has shattered those hopes. Economists say a slowdown in growth in the eurozone as energy costs rise could become a recession if gas and oil supplies from Russia are cut off.

The European Union Statistics Bureau said on Friday that the gross domestic product of the eurozone’s 19 countries – a broad target for the goods and services produced by its economy – was 0.2% higher in the first quarter than in the last three months of 2021. If this growth rate were maintained over four quarters, the euro area economy will grow by 0.8% during the year. In contrast, the US economy fell at an annual rate of 1.6% in the first quarter.

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Figures for consumer prices in April, also published by Eurostat, recorded an increase in annual inflation to 7.5% from 7.4% in March. Energy prices fell 3.7% during the month, but were still 38% higher than the year before.

That jump in energy costs provides the most serious headwind for the eurozone economy, although new disruptions in the supply of finished goods and parts from China are also creating problems for companies.

“This rise in energy prices reduces demand and increases production costs,” Luis de Guindos, vice president of the European Central Bank, said in a speech on Thursday.

“The war also weighs on business and consumer confidence and has created new bottlenecks,” he said. “This development points in the direction of slower growth in the coming period.”

In response to the rise in inflation in recent months, the ECB has said it is likely to end its bond buying program in the three months to September, paving the way for a first rise in its key interest rate since 2011.

Studies of the activity in the weeks since Russia’s invasion of Ukraine on February 24 have shown that the eurozone economy is holding up better than some economists and policy makers had feared.

The Ifo survey of German companies recorded a recovery in confidence during April following a decline in March, and the EU consumer survey also recorded a partial setback. Surveys of purchasing managers conducted by the computer company S&P Global also pointed to continued growth and a strong job market.

But the longer the war lasts and the energy costs remain high, the greater the risk that growth will slow down. Together with most other forecasters, the International Monetary Fund lowered its growth forecast for the euro area this year to 2.8% from 3.9% earlier this month, when it last published projections in January. It said growth could be weaker in some major eurozone economies, including France, Germany and Italy.

“There is a risk that some of them may enter a technical recession, a mild technical recession,” said Alfred Kammer, head of the IMF’s European division.

A recession would be much more likely if Russia decided to cut its sales of natural gas and oil to eurozone members such as Germany, or if the EU imposed its own embargo on energy imports from the country.

When the sanctions stood on in April and provided that oil prices averaged around $ 100 per barrel. barrel in 2022, economists at JPMorgan estimated that the eurozone’s energy import bill would amount to almost 600 billion euros, equivalent to 634 billion dollars, this year, an increase over the pre-pandemic average equivalent. to 2.5% of its annual economic output.

However, in the event of a halt to Russian imports, they estimate that the bill could rise by a further 2% to 3% of economic output, sharply reducing the amounts that households and businesses had available to spend on goods and services produced. in the currency area.

A sudden shutdown of Russia’s energy supply could also lead to a decline in the production of industries that have few alternatives.

“If the natural gas supply from Russia were to stop suddenly, it would cause irreparable economic damage,” said Martin Brudermüller, CEO of the German chemical giant BASF SE..

In a speech to shareholders on Friday, Mr Brudermüller said the company may have to stop production at its Ludwigshafen plant if Russian gas supplies stop soon.

“To put it bluntly, there is no short-term solution to replace natural gas from Russia,” he said. “We will use every opportunity to reduce our dependence on Russian gas as soon as possible.”

The EU Bureau of Statistics did not provide a breakdown of economic activity in the first quarter, but the national agencies gave a sense of what was behind the modest increase in activity.

In France and Spain, large declines in consumer consumption held back growth in the first quarter, reflecting the impact of Covid-19 restrictions on access to hospitality and other services requiring proximity to other people, and pressure on household budgets from rising energy bills. But in both countries, investment spending and exports continued to rise.

While France’s economy stagnated and Spain’s declined, Germany’s economy returned to growth after declining in the last quarter of 2021. In contrast, Italy’s economy declined in the first months of this year after growing in the last three months of last year.

Write to Paul Hannon at

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