EU economic outlook clouded by inflation and energy crisis

(Xinhua) 08:04, August 17, 2022

* Inflation and the energy crisis that has lasted for months across Europe are clouding the economic outlook and shaking residents’ confidence in consumption.

* The European Union encourages its Member States to reduce their energy consumption and improve their energy efficiency, an approach whose effectiveness is questioned.

* Analysts said the growth of the European economy in the second quarter could be the last optimistic mood for an expected recession in the second half of the year as the economic reset effect gradually weakens.

BRUSSELS, Aug. 16 (Xinhua) — Inflation in Europe has hit a new high and the months-long energy crisis shows no signs of easing, but is weakening consumption and clouding the economic outlook.

The European Union (EU) has asked its member states to reduce energy demand, a measure whose effectiveness is questioned. The bloc’s economic outlook, plagued by runaway inflation and an energy crisis, has become increasingly bleak with lingering downside risks.

The ramifications of soaring energy prices are being felt across Europe, due to several negative factors, including the fallout from massive sanctions on Russia and the fallout from aggressive interest rate hikes in the United States.

INFLATION UP, CONSUMPTION DOWN

European residents now have to deal with the soaring cost of living and the decline in real purchasing power, which have shaken their confidence in consumption.

At the same time, soaring energy costs have also led to a drop in industrial production and the closure of some energy-intensive businesses, leaving more adverse effects on the European economy.

A customer walks past empty cooking oil shelves at a supermarket in Paris, France, March 26, 2022. (Xinhua/Gao Jing)

In June, sales fell 1.2% month-on-month, or 3.7% year-on-year, in the eurozone, according to new estimates from European statistics office Eurostat.

While in the EU, retail trade volume in June was down 1.3% from May, or 2.8% from June 2021.

Costs jumped at a time when retail sales fell.

In June, industrial producer prices in the euro zone increased by 1.1% compared to May and jumped by 35.8% compared to June 2021, Eurostat reported.

The EU saw industrial producer prices rise 1.3% from May to June, an annual increase of 36.1% from June last year, Eurostat said.

Transportation and other costs transmit more upward pressure to consumers, resulting in more downward pressure on demand.

“With PMIs (Purchasing Managers Indices) indicating that services consumption is also weakening in the Eurozone as the effects of reopening fade and a surge in tourism is about to end , it is likely that consumption will contract over the next few quarters, leading to a mild recession in the eurozone,” Bert Colijn, senior eurozone economist at global financial institution ING, wrote in an analysis.

“The sharp fall in eurozone retail sales in June means that sales have contracted in the second quarter as a whole,” the Business Times said, quoting Michael Tran, deputy economist at London-based consultancy Capital Economics.

“With the final PMI surveys indicating that price pressures continue to intensify and demand is weakening, we believe household spending will struggle over the coming months,” he said.

DOUBTS REMAIN

To ensure energy supply as winter approaches, the EU encourages its Member States to reduce their energy consumption and improve their energy efficiency. An agreement by EU member states to cut demand for gas this winter by 15% entered into force this month. However, questions remain over whether the deal will ultimately work.

Photo taken on August 1, 2022 shows a night view of the city hall in Hanover, Germany. Some iconic structures across the country have dimmed their nighttime lighting to save electricity. (Photo by Joachim Sielski/Xinhua)

On the one hand, due to the uneven gas storage and distribution capacity between EU member states, differences over the deal remain within the EU.

Hungary, for example, questioned the legitimacy of EU rules that affect the national energy mix or a country’s energy security. Poland called the deal’s legal basis “flawed”, saying decisions affecting the energy mix of EU member states would have to be taken with the unanimous approval of all countries.

On the other hand, analysts pointed out that the agreement itself was full of compromises and doubted that the 15% gas savings target would even guarantee a pleasant winter in Europe.

Nathan Piper, oil and gas analyst for Investec, an international banking group, said there was a “high political and economic price” as the EU seeks to reduce its reliance on Russian gas, and that price was reflected in exemptions for its members, which would likely reduce the impact of the measures.

Photo taken on June 28, 2022 shows the site of the Midia natural gas development project in the village of Vadu on the Black Sea coast in southeastern Romania. (Photo by Cristian Cristel/Xinhua)

The coal ban imposed by the EU on Russia came into force on August 11 and the oil ban will come into force in December. During the four-month transition, the EU increased its coal imports from countries such as the United States, Australia, South Africa and Indonesia. Potential alternatives have resulted in higher costs, especially when electricity consumption remains high during the European summer which is hit by historic heat waves this year.

Germany, Italy, Austria, the Netherlands and Denmark have all announced plans to restart coal-fired power plant projects.

“Europe remains dependent on two things: the winter cold and the development of Russian flows in the spring. Uncertainty on both will likely keep prices supported even if stocks continue to increase in the coming months. “said Giovanni Staunovo, an analyst at UBS. Global Wealth Management.

DARK ECONOMIC OUTLOOK

Although the European economy grew in the second quarter, analysts said it could be the last optimistic mood for an expected recession in the second half of the year, as the economic reset effect wears off. gradually weakens.

Photo taken on June 1, 2022 shows the euro sculpture in Frankfurt, Germany. (Xinhua/Lu Yang)

The Organization for Economic Co-operation and Development (OECD) said in its latest Composite Leading Indicators (CLI) publication that “Drowned by historically high inflation, low consumer confidence and falling stock market indices, CLIs remain below trend and continue to anticipate a loss of growth momentum in most major OECD economies.

The CLIs, designed to anticipate turning points in economic activity over the next six to nine months, continue to “signal deteriorating prospects in most major economies,” the report said.

“This is the case for Canada, the United Kingdom and the United States, as well as the euro zone as a whole, including France, Germany and Italy,” he said. .

The German economy stagnated in the second quarter of this year, with gross domestic product (GDP) remaining unchanged at 0.0% from the previous quarter, the Federal Statistical Office (Destatis) said.

“A good decade has ended for Germany – from now on we will have a hard time for a while,” Bloomberg said, citing Dekabank industry economics analyst Andreas Scheuerle.

Scheuerle predicted a winter recession for Germany. “Germany is Europe’s problem child in many ways,” he said. “Nowhere else are supply shortages hurting the economy more, the shortage of skilled workers has increased, and of course there is our extremely high reliance on Russian gas.”

“It’s clear that the continued supply chain disruption, rising energy prices and record levels of inflation will have a longer-term impact,” chief strategy officer Rachel Barton told CNBC. Europe for Accenture.

According to a survey published by Oxford Economics on August 12, respondents see a nearly 60% chance that the euro zone will follow the United States into a technical recession over the next 12 months.

“The growth momentum in the second half of 2022 appears to be weakening as high and widespread inflation, energy-conserving measures and tighter financial conditions increasingly weigh on activity,” he said. the institute in a note.

For European bankers, this appears to be an interest rate dilemma. “The very gradual and cautious normalization process that the ECB (European Central Bank) launched at the end of last year has simply been too slow and too late,” said Carsten Brzeski, global head of macro at ING. Germany.

(Web editor: Zhong Wenxing, Liang Jun)

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