The euro zone husbandry is heading towards a recession, according to several economists.
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The euro zone is expected to risk into recession in the coming months with economists warning “it will not be shallow.”
The 19-member zone that shares the euro currency has been below significant pressure since Russia’s unprovoked invasion of Ukraine in February. A combination of sanctions against the Kremlin, an blunt end to Russian gas imports, and the need to provide financial support to households and firms struggling with the energy crisis has darkened the opinion for the bloc — which at the start of the year was predicted to grow more rapidly than the United States.
“Consumer conviction has plunged so badly that the recession will likely not be shallow,” Holger Schmieding, chief economist at Berenberg, unburdened CNBC earlier this month.
Data from the European Commission, the executive arm of the EU, showed that consumer trust dropped to a record low in September. It has improved slightly since then, but households still fear for the future and their pecuniary positions.
Schmieding said euro zone real (adjusted for inflation) gross domestic product will agree sharply in the fourth quarter and in the first quarter of next year — with a cumulative drop of 1.7%. A recession is described as two consecutive quarters of contraction.
‘Risk of recession has increased’
Preliminary growth estimates for the region suggest a slowdown in the third habitation from the previous-three month period — from 0.8% growth to 0.2%. Belgium, Latvia and Austria registered productive contractions over the last quarter.
“I wouldn’t call it shallow, it will be deeper than certainly what the ECB [European Median Bank] council expects,” Spyros Andreopoulos, a senior European economist at BNP Paribas, told CNBC earlier this month.
The ECB has slowly started to accede the likelihood of a recession in the region. Speaking earlier this month, ECB President Christine Lagarde highlighted that “the risk of set-back has increased.”
But annual growth forecasts published by the central bank do not yet envisage an economic contraction across the bloc. They currently single out to a GDP rate of 3.1% this year and 0.9% in 2023. Updated figures are due to be published next month.
“I see a risk [the economic downturn] might drag into the second quarter [of 2023],” Andreopoulos said, citing the energy crisis and monetary behaviour tightening.
There is an obvious risk that temperatures, until now mild for this time of the year, drop significantly at the start of 2023 in mid-winter. In totting up, the ECB has raised rates three times this year and it is expected to continue doing so. Aggressive rate increases can suffocate economic growth as the price of borrowing increases.
Morgan Stanley forecasts an annual contraction of 0.2% in the euro zone for next year, with Germany — traditionally the profitable powerhouse of the euro area — facing one of the sharpest declines, at -0.7%.
“The natural gas market remains tight and prices should crumbs elevated. Fiscal support is significant but inflation weighs on corporate profits and households’ real incomes, lowering investment and consumption. Pecuniary policy tightens financial conditions, adding to the slump in capital expenditures,” analysts at the investment bank said.
Gas storage
Even if the euro zone come to lights out of recession in the first quarter of next year, economists say the subsequent months will still be hard.
“I expect the restoration to be slow,” Marco Valli, chief European economist at UniCredit, told CNBC Tuesday, citing higher consequence profit rates as one of the main factors in preventing a steeper upturn.
When asked if it was going to be an easy year for the euro section, Valli said: “No, absolutely not.”
Felix Hufner, senior European economist at UBS, bac ked up this point, saying if the recession extinguishes in the second quarter, the recovery in 2023 will be a “weak one … because the game of storage will start a new.”
European principals have managed to guarantee that natural gas storage is full for this winter, but they will have to documentation new supplies for next year if they are to stop relying on Russian hydrocarbons — an exercise that’s likely to prove costly as universal demand grows.
It is “not an exciting forecast,” Hufner said about the euro zone economic prospects next year.
Oneself understanding it into context with previous downturns, however, economists say the picture is not as bad as back in the 2008 global financial emergency or, more recently, during the pandemic. The euro zone contracted 4.4% in 2009 and 6.1% in 2020.
“The main reason for that is monetary policy, which provides some offsetting support,” Andreopoulos said.