Economic growth in the eurozone slowed to 0.2% in a first quarter of the year marked by the war in Ukraine and the escalation of inflation, which during April rose again one tenth and sets a new record at 7.5%, according to preliminary data published this Friday by Eurostat.
(Read: Inflation in Europe would be close to reaching its peak)
In the European Union (EU) as a whole, the advance of the Gross Domestic Product (GDP) compared to the previous quarter was 0.4%, with which growth remains in both areas one tenth below that registered in the last three months of 2021.
(You are interested: The United States economy contracted 0.4% in the first quarter)
The first estimates of the community statistical office reflect that the economy slowed down in most European countries and that, among the large euro countries, the advance in GDP was, in the best of cases, just a few tenths.
The Spanish economy was the one that grew the most with a rise of 0.3%, far from the 2.2% harvested in the last quarter of 2021, due to the contraction in household consumption due to the pandemic and the energy crisis derived from the invasion of Ukraine that began on February 24, according to the National Statistics Institute.
While Germany managed to avoid the technical recession thanks to a rise in GDP of 0.2% driven by investments, after having fallen by 0.3% in the last quarter of last year.
We see a eurozone economy that has endured a turbulent quarter but has barely managed a small number of positive growth.
On the contrary, the French economy stagnated and the Italian economy fell by 0.2%, compared to the previous advance of 0.8% and 0.7%, respectively, penalized in both cases by high inflation and the drop in consumption of the homes.
The data, which Eurostat completed and updated in May, confirm the forecasts that economic growth would already weaken in the first quarter due to the war in Ukraine, which has aggravated the rise in energy prices and generated new supply problems.
“With the impact of omicron softer than expected and the war in Ukraine having an increasing impact since the beginning of March,” analyzes ING economist Bert Colijn.
The reopening of the economy, he points out, “has boosted growth to a certain extent and postponed the damage that high prices will bring to household consumption.”
Inflation rises to 7.5
And the slowdown in the economy in the first quarter of the year is accompanied by record levels on the inflation front, which in April stood at 7.5% in the euro zone in year-on-year terms, a percentage higher than the figure observed in March.
The main cause of the increase in prices continues to be energy products, which were already skyrocketing months before the Russian war in Ukraine but which have been exorbitant since the beginning of the invasion, mainly driven by the high price of gas.
Even so, the rise in the price of energy, according to the preliminary estimate of Eurostatmoderated in April, since in March it exceeded 44.4% and in March it contracted more than six points, to 38%.
In contrast, the price of the rest of the product categories continued its growth path, with unprocessed foods topping the list with an inflation of 9.2%, followed by processed foods, alcohol and tobacco (5.5% ), non-energy industrial goods (3.8%) and services (3.3%).
By country, the Baltic partners are suffering the biggest blow, with inflation rates of 19 percent in Estonia, 16.6 percent in Lithuania and 13.2 percent in Latvia, while the countries of the common currency with lower price increases in April were Malta (4.9%), France (5.4%), Finland (5.6%) and Italy (6.6%).
These data continue to put pressure on the European Central Bank (ECB), whose vice president, Luis de Guindos, assured this Thursday before the Economic Affairs Committee of the European Parliament that inflation will “probably” continue to be high during the coming months.
He pointed out that inflation expectations “have risen in recent months and early signs of over-target revisions in these measurements warrant close monitoring.”
Pressure builds on the ECB
Inflation in the eurozone rose to a new record high, mounting pressure on the European Central Bank to remove stimulus introduced during the pandemic and raise interest rates.
Consumer prices rose 7.5% from a year earlier in April, in line with the median estimate of economists surveyed by Bloomberg. An index that excludes volatile items such as food and energy advanced 3.5%.
Energy remains the key factor and was back in the spotlight this week when Russia stopped natural gas supplies to Poland and Bulgaria, threatening other European Union members with the same if they don’t pay for fuel in rubles.
ECB officials are increasingly concerned that persistent price pressures will lead to more permanent inflation above their 2% target, signaling an end to large-scale asset purchases and interest rates at historical lows they can arrive in the summer.
Bank of America on Friday projected a steeper rise for borrowing costs than beforesaying the ECB is likely to raise rates by a quarter point four times in 2022, starting in July, and another two times next year.
Crucial decisions for ECB officials on the agenda for their June 8-9 meeting are complicated by extreme uncertainty in the outlook as the Ukraine war damages confidence and raises fears of power shortages.
Supply chains have also been affected by lockdowns in China, forcing companies like BMW AG and Robert Bosch GmbH to close factories.
The 19-country euro economy grew 0.2% in the first quarter and while many analysts still say a recession is averted, they see the growth momentum, along with inflation, slowing in the second half of 2022.
ECB Vice President Luis de Guindos said on Thursday that price pressures are “very close” to reaching their peak, although he warned that they will not fall below 4% this year.
Russian economy suffers severe blow
According to their projections, Russian GDP will shrink by between 8% and 10% in 2022. The decline will be mainly driven by supply-side factors.
The Russian economy will also contract between 8% and 10% this year due to Western sanctions imposed on Russia for its military campaign in Ukraine, which represents the worst drop in Russian GDP since 1994, when it contracted by 12.7%.
“The external environment of the Russian economy remains challenging and significantly limits economic activity,” said the Russian monetary entity after an ordinary meeting of the board of directors, which it published for the first time since the start of the armed conflict on February 24. macroeconomic forecasts.
The institution led by Elvira Nabiúlina maintains that in 2023, the Russian economy will grow again “gradually in the midst of a structural transformation.”
Thus, the Central Bank of Russia (BCR) believes that in the fourth quarter of 2023, GDP will increase by 4.0-5.5% compared to the same period in 2022. However, for the year as a whole the Russian economy will not grow or will remain in negative territory.
The monetary regulator fixes the Russian GDP for the next year in a range of -3.0% and 0%, due to the base effect of the first quarter of 2022. In 2024, the GDP will increase between 2.5% and 3 .5% predicts the BCR.
The board of directors of the Bank of Russia has also lowered the interest rate by 300 basis pointsup to 14% on the grounds that “price and financial stability risks are no longer increasing”.
Recent weekly data indicates a slowdown in current price growth rates due to a strengthening ruble and cooling consumer activity.
Their future decisions will depend on factors such as the efficiency of import substitution processes and the scale and speed at which imports of finished products, raw materials and components will be recovered.
“The Bank of Russia’s monetary policy will take into account the need for a structural transformation of the economy and will guarantee the return of inflation to the target in 2024,” he points out, a target of 4% that is far away at the moment.
The entity calculates that annual inflation will be between 18% and 23% this year, before falling to 5% or 7% next year and returning to the 4% target the following.
INTERNATIONAL WRITING
*With information from EFE, AFP and Bloomberg
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