Eurozone is in Recession, Will Sink Deeper Into Dragflation
COVID War lockdowns led to Ukraine War sanctions.
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The Eurozone—20 countries that share the euro as their currency—entered a technical recession in this year’s first quarter, with the collective economy shrinking 0.1 percent, according to Eurostat, the European Union’s statistics agency.
Eurostat also revised its fourth-quarter figures from 2022. It had estimated the region’s economy flatlined during the period but now says the zone’s GDP drifted down 0.1 percent.
A technical recession is defined as two quarters of declining economic productivity.
Germany, the Eurozone’s largest economy, led the way downward. Government data showed it had been driven into recession by the series of energy price shocks caused by Russia’s successive cuts in natural gas deliveries, Western sanctions, and Europe’s pledge to stop buying Russian gas.
The back-to-back contractions “suggest the impact of Russia’s war in Ukraine might have been deeper than expected,” The Wall Street Journal noted. “The weakness in Germany is a particular concern.”
Economies grew in France, Italy, and Spain, Europe’s three other largest economies. However, as Europe’s leading manufacturer, Germany and its fortunes lead the rest of the region’s economy up or down.
The zone’s last technical recession came early in the COVID War in 2020.
The region continues to struggle with record-high food prices, as we reported in “Europe: First an Energy Shock, Now a Food Shock” (30 May, 2023). Natural gas prices set a series of records last year as a result of the Ukraine war and Europe’s decision to end its purchase of Russian natural gas. However, Europe’s energy prices have retreated significantly this year.
Consumers spent 0.3 percent less during this year’s first three months after cutting purchases 1 percent in the previous quarter.
Imports fell sharply in the two most recent quarters as demand puckered, weakening export sales in other nations.
Economists are forecasting a long, slow recovery for the region, already mired in the effects of the European Central Bank’s (ECB’s) steadily higher interest rates.
Inflation across the Eurozone stood at 6.1 percent in May, its lowest in more than a year, but still more than three times higher than the central bank’s 2-percent target.
As a result, the bank is likely to lift its key interest rate by a quarter point at its 15 June meeting and again in July before pausing increases for the rest of this year, according to a “clear majority” of economists surveyed by Reuters.
The European Commission predicts the continent’s economy will grow by 1.1 percent this year and 1.6 percent in 2024.
TREND FORECAST: As the central bank scrambles to catch up with inflation, the Eurozone will sink deeper into Dragflation, our Top 2022 Trend defined by rising prices and shrinking economic productivity.
The energy crisis created by the Ukraine War and Western sanctions will prolong not only inflation, but also the continent’s recession, giving inflation a greater chance to embed itself across the economy and realizing one of the ECB’s greatest fears.
Again the reality is simple: The higher interest rates rise, the deeper the Eurozone’s economy and equity markets will fall. And with the EU in recession and it being expected that the European Central Bank will raise interest rates on Thursday, a bad situation will be made worse.
Powell will continue to raise rates until the EU is dead. 🍿