Macroscope | 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

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The newly built Steag gas and steam power plant in Herne, Germany, is seen on August 25. Securing reliable energy supplies and fending off recession are just some of the problems weighing on the minds of German policymakers. Photo: AFP

Published: 3:30am, 30 Aug 2022

There is a well-known market adage that, when the United States sneezes, the world catches a cold. The same could be said about the impact Germany has on its European partners. If the German economy is in trouble, Europe feels the fallout. The Ukraine war and the global energy crisis are stacking up a pile of problems for Germany, and Europe as a whole.

The economy is slowing, headline inflation is rising and the spectre of recession is looming large. With no prospect of Russia’s invasion of Ukraine being sorted out soon, Europe could be heading into a winter of discontent, with energy supply disruptions and industrial shutdowns likely to take a toll on economic confidence and growth.

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 prospects of a recession must be high, considering the marked downturn in global economic conditions. Even so, major forecasting bodies are still relatively hopeful that a deeper slump can be avoided.

.css-1m2rp1p{color:#34b8b5;}Macroscope | Energy crisis, Ukraine war could leave Germany and the rest of Europe facing a winter of recession

Macroscope | Energy crisis, Ukraine war could leave Germany and the rest of Europe facing a winter of recession