Between war and pandemic, the European economy marked time in the first quarter

Activity in Europe remained positive in the first quarter of 2022, at 0.4%, according to Eurostat’s figures released Friday. Gross domestic product (GDP) growth nevertheless slowed by 0.1 point compared to the previous three months.

In the eurozone, GDP growth was 0.2%, again -0.1 points compared to the fourth quarter of 2021, while inflation reached a record one-year level of 7.5% in April for the 19 countries participating in the share a single currency.

In addition to the ongoing impact of the Covid-19 pandemic on business, notably through the new Omicron variant, “To this came the effects of the international crisis linked to the Russian invasion of Ukraine,” pointed out the Spanish Institute of Statistics (INE).

Germany, the largest European economy, grew by 0.2% in the first quarter and escaped a technical recession, after GDP fell by 0.3% at the end of the year. France stagnated (0%) and Italy fell (-0.2%).

GDP at 0%: French economy stagnates in the first quarter against a backdrop of inflation and the war in Ukraine

The delay was very pronounced in Spain. The country is outperforming its neighbors with a GDP growth of 0.3%. But that is significantly lower than the 2.2% in the last quarter of last year. The rise in gas and electricity prices in this country was particularly severe, resulting in a sharp decline in household consumption.

worldwide, The eurozone economy had a choppy quarter, but managed to maintain slightly positive growth, with the impact of Omicron weaker than expected and the war in Ukraine increasing in impact from early March. summarizes Bert Colijn, economist at ING bank.

According to him, “Supply chain issues resumed in March, leading to production stoppages, contributing to the slowdown,” already predicts a contraction in the second quarter and “significant difficulties” these coming months.

The IMF had lowered its eurozone growth forecast to 2.8% in 2022 ten days ago, from 3.9% expected so far. The European Commission will publish its own figures on 16 May.

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Contraction expected for the second quarter

“Eurozone GDP is expected to contract in the second quarter as the effects of the war in Ukraine and rising energy prices weigh on household incomes and consumer confidence, while making life difficult for industrialists,” he said. also believes Andrew Kenningham, an expert from Capital Economics.

According to him, German manufacturers “hardest blow” than those of other European countries“but rising energy prices will affect the entire region, as will declining demand for exports and declining business confidence.”

With inflation well above the 2% target, the European Central Bank (ECB) has “will have no choice but to address price stability as a priority” by raising interest rates, at the risk of slowing growth, Andrew Kenningham emphasizes.

The price increase of 7.5% year-on-year in April is the highest recorded by the European Statistical Office since the inception of this indicator in January 1997. A new record has been broken every month since November.

Inflation is mainly driven by energy prices (+38%), which, however, are slowing down slightly compared to the 44% increase in March. But the price increase is accelerating in the other sectors: food (+6.4%), industry (+3.8%) and services (+3.3%).

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The specter of stagflation returns

Flat growth linked to inflation: the combination of these two phenomena creates the specter of stagflation. This usually happens after a shock that hits the economy and affects the entire production chain, prices and employment.

In the 1970s, the oil shocks caused by the fall in supply and the rise in the oil price triggered a period of stagflation, to which the central banks immediately reacted with a restrictive monetary policy by raising interest rates to curb inflation. reducing the burden on households.

Despite the eurozone growth slowing to 0.2% in the first quarter compared to the previous quarter and inflation remaining at 7.5% over the year, there is still no sign of stagflation. We have to wait for this situation to continue “more than a few quarters”, assures Pierre Jaillet, researcher at the Jacques-Delors European Institute.

This situation also complicates the task of the European Central Bank (ECB). To fight inflation, it can raise its key rate. But monetary tightening raises the cost of borrowing for businesses and households, which could ultimately weigh on consumption and investment. ECB President Christine Lagarde on Wednesday opened up the possibility of a first rate hike this summer if inflation continues at high levels. In the same vein, in March the ECB already stopped the emergency program intended to support the economy during the crisis caused by Covid-19 and stated it would stop net asset purchases from the summer.

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(with AFP)