The eurozone’s economic system continued to develop at a modest tempo within the first three months of the yr, however faces the specter of a slide into recession as Russia’s warfare on Ukraine retains vitality prices excessive and squeezes family spending energy.
Restrictions meant to include the unfold of the Omicron variant of Covid-19 weighed on exercise firstly of the yr. That burden eased because the quarter progressed and the eurozone economic system appeared set for a robust restoration this yr.
However, President
Vladimir Putin’s
late-February invasion of Ukraine has dashed these hopes. Economists say a slowdown in eurozone progress as vitality prices surge may turn out to be a recession if provides of fuel and oil from Russia are interrupted.
The European Union’s statistics company Friday mentioned the 19-nation eurozone’s gross home product—a broad measure of the products and providers produced by its economic system—was 0.2% greater within the first quarter than the ultimate three months of 2021. If that progress charge have been sustained over 4 quarters, the eurozone economic system would develop 0.8% over the yr. By distinction, the U.S. economic system contracted at an annualized charge of 1.4% within the first quarter.
Figures for client costs in April additionally launched by Eurostat recorded a pickup within the annual charge of inflation to 7.5% from 7.4% in March. Energy costs fell 3.7% in the course of the month, however have been nonetheless 38% greater than a yr earlier.
That leap in vitality prices presents probably the most critical headwind for the eurozone economic system, whilst new disruptions in provides of completed items and elements from China additionally creates issues for companies.
“This surge in energy prices is reducing demand and raising production costs,” mentioned
Luis de Guindos,
vp of the European Central Bank, in a speech Thursday.
“The war is also weighing heavily on business and consumer confidence and has created new bottlenecks,” he mentioned. “These developments point to slower growth in the period ahead.”
Responding to the surge in inflation over latest months, the ECB has mentioned it will probably finish its program of bond purchases in the course of the three months by September, opening the way in which for a primary improve in its key rate of interest since 2011.
Surveys of exercise within the weeks since Russia’s Feb. 24 invasion of Ukraine have proven the eurozone economic system holding up higher than some economists and coverage makers had feared.
The Ifo survey of German companies recorded a rebound in confidence throughout April after a decline in March, and the EU’s survey of customers additionally recorded a partial bounceback. Surveys of buying managers performed by information agency S&P Global additionally pointed to continued progress and a robust jobs market.
However, the longer the warfare lasts and vitality prices keep excessive, the better the danger that progress will fade. Along with most different forecasters, the International Monetary Fund earlier this month lowered its progress forecast for the eurozone this yr to 2.8%, from 3.9% when it final revealed projections in January. It mentioned progress might be weaker in some massive eurozone economies, together with France, Germany and Italy.
“There is a risk that some of them could enter a technical recession, a mild technical recession,” mentioned Alfred Kammer, head of the IMF’s European division.
A recession would turn out to be more likely if Russia determined to chop its gross sales of pure fuel and oil to eurozone members akin to Germany, or if the EU imposed its personal embargo on vitality imports from the nation.
As sanctions stood in April and assuming oil costs averaging round $100 a barrel in 2022, economists at JPMorgan estimated that the eurozone’s vitality import invoice would quantity to virtually 600 billion euros, equal to $634 billion, this yr, a rise over the prepandemic common equal to 2.5% of its annual financial output.
But within the occasion of a halt to Russian imports, they calculate that the invoice may rise by an extra 2% to three% of financial output, sharply decreasing the quantities that households and companies had obtainable to spend on items and providers produced within the foreign money space.
A sudden shutdown of Russian vitality provides may additionally result in a decline within the output of industries which have few alternate options.
“If the natural gas supply from Russia were to suddenly stop, it would cause irreversible economic damage,” mentioned
Martin Brudermüller,
chief govt of German chemical compounds large
BASF SE.
Speaking to shareholders Friday, Mr. Brudermüller mentioned the corporate may need to cease manufacturing at its Ludwigshafen plant if Russian fuel provides have been to finish quickly.
“To put it plainly, there is no short-term solution to replace natural gas from Russia,” he mentioned. “We will use all options to reduce our dependence on Russian gas as swiftly as possible.”
The EU’s statistics company didn’t give a breakdown of financial exercise within the first quarter, however nationwide businesses did present some sense of what lay behind the modest rise in exercise.
In France and Spain, huge declines in client spending held again progress in the course of the first quarter, reflecting the impression of Covid-19 restrictions on entry to hospitality and different providers that require proximity to different folks, and stress on family budgets from rising vitality payments. However, in each nations, funding spending and exports continued to extend.
While France’s economic system stagnated and Spain’s slowed, Germany’s economic system returned to progress after contracting within the ultimate quarter of 2021. By distinction, Italy’s economic system contracted within the early months of this yr, after rising within the ultimate three months of final yr.
Corrections & Amplifications
The U.S. economic system contracted at an annualized charge of 1.4% within the first quarter. An earlier model of this text incorrectly mentioned the U.S. economic system contracted at an annualized charge of 1.6% within the first quarter. (Corrected on April 29)
Write to Paul Hannon at [email protected]
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