Europe on the brink: States fighting the recession | Business

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Almost six months after Vladimir Putin ordered Russian troops into Ukraine, the extent of the damage to the European economy is becoming clear. The red lights of the recession are blinking.

Growth forecasts for the eurozone’s four major economies – Germany, France, Italy and Spain – were downgraded by the International Monetary Fund for 2023 as a combination of war and higher interest rates slowed economic activity.

In the UK, inflation is above 10% for the first time in 40 years as households grapple with rising energy bills. The Bank of England forecasts that inflation will peak above 13% in the autumn after a renewed rise in energy costs as the economy slides into a prolonged recession.

As the UK grapples with additional pressure from Brexit, the impact of rising energy prices, supply chain disruption, labor shortages and drought is also hitting the rest of Europe. Analysts at the Economist Intelligence Unit say the pain could linger for some time as countries wean themselves from Russian hydrocarbons and it will take time to build up renewable energy as an alternative.

“In the short term, we expect a recession in Europe in the winter of 2022-23 as a result of energy shortages and persistently elevated inflation,” the EIU said. “The winter of 2023/24 will also be challenging and as such we expect high inflation and sluggish growth until at least 2024.”

Here we assess the chances of a recession in the EU – and in Russia.

Germany

Europe’s largest economy is at the center of the storm as the energy crisis, months without rain and a collapse in global trade hit its manufacturing base. Economic growth slowed to a standstill in the second quarter and is likely to turn negative in the coming months.

“It will take an economic miracle so that Germany does not slip into recession in the second half of the year,” said Carsten Brzeski from the Dutch bank ING. “The fact that the entire business model of the German economy is currently under scrutiny will also weigh on growth prospects in the coming years.”

Graph showing rapidly rising inflation in France, Germany, Italy, Spain and the UK

In 2020, Russia supplied more than half of Germany’s gas and about a third of all its oil. Since the war broke out, the Kremlin has cut back supplies, blaming technical problems for the decline in volumes from the vital Nord Stream 1 pipeline.

Drought and scorching temperatures have caused water levels to drop sharply down the Rhine, a vital transport route for Germany’s dominant industrial sector. The water level has fallen below the critical 40cm mark, preventing the barges from being fully loaded. Some routes have been cancelled, causing delays for chemical companies and other manufacturers in industrial heartlands. Factories along the banks of the Rhine that rely on water for cooling are also struggling, while coal supplies to power stations – which were designed to keep the lights on – are likely to be disrupted.

As a reaction to the energy crisis, Berlin will levy a gas surcharge for households from October to April 2024, which is intended to distribute the higher wholesale costs between households and businesses.

The Government has unveiled an energy support package worth more than €30bn (£26bn), including a €300 lump sum for workers, extra support for welfare recipients, cuts in petrol and diesel taxes and a €9 rebate on bus and coach fares train tickets .

Chancellor Olaf Scholz has also promised a new package of financial support.

Probability of recession (out of five)

France

France should be better isolated than many other European nations thanks to its large nuclear energy sector, which accounts for just over 70% of its electricity generation, but it is grappling with severe disruptions from aging reactors. Though in a less vulnerable position than Germany, the eurozone’s second largest economy could still face damaging power outages this winter.

GDP grew by 0.5% in France in the second quarter, lower than other countries on the continent, with domestic consumption being particularly weak. The government has unveiled a €20 billion emergency aid package, including tax cuts on petrol pumps while limiting increases in regulated electricity prices to 4%, a policy backed by state ownership of energy giant EDF.

chances of a recession

Italy

The Italian economy has recently developed much more strongly than its major competitors in the euro zone and recorded growth of 1% in the second quarter. But like Germany, Italy is heavily dependent on Russian gas and has the added complication of being plunged into a new period of political uncertainty following Mario Draghi’s resignation as prime minister earlier this summer.

Opinion polls suggest a change in direction of Draghi’s technocratic approach after the upcoming elections. A right-wing coalition government that campaigned on a heavily nationalist and protectionist economic platform is expected to win.

Graph comparing expected growth in 2022 to expected growth in 2023, which is much lower, for Spain, France, Germany, Italy and the UK

The financial markets and the European Central Bank are already aware of the risk that investors will demand a higher interest rate premium for buying Italian bonds. With Italy firmly in focus, the ECB last month announced a new financial instrument designed to prevent higher interest rates from having a disproportionately negative impact on more vulnerable member states.

In early August, Italy approved a new aid package worth around €17 billion for consumers and businesses, one of Draghi’s final acts as head of state. A tax cut on petrol and diesel, due to expire this month, has also been extended to September 20.

Since the introduction of the single currency almost a quarter of a century ago, Italy has been the weakest of the “Big Four” with living standards barely higher than in the late 1990s. It is benefiting this year from a surge in tourism, which accounted for 13% of its GDP before the pandemic.

chances of a recession

Spain

Like every other country in Europe, Spain has been hit by the war in Russia, but of the Big Four it has the best chance of avoiding a recession, despite rising inflation.

There are a number of reasons for this. The economy entered the crisis in fairly good shape and – like Italy – received an additional boost from the post-pandemic tourism surge. Tourism accounted for 12% of Spain’s GDP before Covid and an even larger share of employment.

But Spain is much less dependent on Russian energy than Italy and is already a major importer of liquefied natural gas from around the world. GDP rose 1.1% in the second quarter and the IMF expects it to be the fastest growing of the big four next year.

The government has provided 16 billion euros in grants and loans to help businesses and households with rising energy costs.

chances of a recession

Russia

Russia has suffered from Western sanctions and its economy has collapsed deep recession and forcing the Kremlin to default on its foreign debt for the first time since 1918, though rising energy prices have helped mitigate some of the impact.

Yale University researchers said last month that the West is crippling Russia’s economy, although other experts disagree. Holger Schmieding, chief economist at Berenberg Bank, said the latest data didn’t point to such a “glaring conclusion”.

A “Stars” coffee bar in Moscow: Russia is already in recession. Photo: Natalia Kolesnikova/AFP/Getty Images

Russia’s current account balance – measured by trade and investment flows – more than tripled to a record surplus of $167 billion in the second quarter, helped by high wholesale oil and gas prices that boosted exports while Western sanctions caused imports to fall led. The proceeds were an important source of foreign exchange for Moscow, as reflected in ruble losses since the invasion began.

However, experts say that in the long run Russia’s economy will struggle with the loss of Western technology and investment. “Our best guess is that Russia is in a major but far from catastrophic recession,” Schmieding added.

chances of a recession

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