Energy crisis, Ukraine war could leave Germany and the rest of Europe facing a winter of recession
- Germany’s economy faces slowing growth, rising inflation and a looming recession, and a downturn there could see the rest of Europe follow, leaving policymakers in a bind about how to respond
It leaves Europe’s policymakers with a big dilemma, whether to stand firm against soaring inflation and run the risk of a deeper recession next year or relent and ease policy again. As Europe’s problems deepen, the euro’s outlook seems even bleaker.
Don’t count on Europe being spared a recession this winter. Growth might appear stable at the moment, with gross domestic product in the euro zone rising by 3.9 per cent in the second quarter, compared with a year ago, but the longer-term outlook is fraught with problems.
German growth is already hitting the skids, with annual growth in the second quarter slowing to 1.7 per cent compared with 3.6 per cent in the first three months of the year. Germany is leading Europe into slower growth.
The Organisation for Economic Co-operation and Development still expects Germany to hit 1.9 per cent GDP growth for 2022 and 1.7 per cent in 2023, while Europe is forecast to expand by 2.6 per cent this year and 1.6 per cent in 2023, despite the adverse conditions. Even the European Commission is putting a relatively brave face on the outlook, expecting European Union growth of 2.7 per cent this year and 1.5 per cent in 2023.
Yet many leading indicators for Germany suggest a recession could be on the cards as early as the fourth quarter of this year. Consumers are feeling the strain from sharp energy price rises, which have seen headline German inflation surge as high as 7.9 per cent in May, easing to 7.5 per cent in July.
If Germany goes into recession, the rest of Europe will be close behind, leaving policymakers in a bind about how to respond. The problem is that the European Central Bank is committed to battening down the hatches against higher inflation and European fiscal finances are already overstretched following the Covid-19 pandemic.
The ECB has embarked on a tougher monetary policy, with a rise of 50 basis points in July and the market is beginning to weigh up the possibility of a similarly large rate rise in September.
Germany and Europe as a whole will just have to weather the storm. It is likely to get worse as winter looms.
David Brown is the chief executive of New View Economics