Eurozone economy grew faster than expected, but so did prices


Consumer prices driven by rising energy costs continued to take a toll on Europe, halting growth in the continent’s traditional engine, Germany, even as other major economies grew faster than expected, data released Friday showed.

In the 19 countries that use the single European currency, consumer prices rose 8.9 percent in July from a year earlier, when inflation hit a new record, the third consecutive month of gains.

The euro-zone bloc’s economies, which benefited from the easing of coronavirus restrictions, grew 0.7 percent in the three months to June from the previous quarter, according to official figures released by the European Union. The estimates will be revised in the coming months as statisticians get more complete data.

But Germany, Europe’s largest economy, faltered in the second quarter as trade slowed and the country struggled with natural gas supplies and deliveries from Russia. Germany still gets nearly a third of its gas from Russia and high energy prices due to Russia’s war in Ukraine have hit the economy particularly hard.

The new data underscore the uncertain economic environment facing Europe. Shocks from the slowdown in China caused by further Covid-19 lockdowns and fears of a recession in the United States, which this week reported a second consecutive bout of contraction, are contributing to a broader global slowdown.

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Calling the outlook for the global economy “increasingly bleak”, the International Monetary Fund lowered its global growth forecasts this week from April’s forecasts, predicting manufacturing will fall to 3.2 percent in 2022 from 6.1. percent last year.

In Europe, where Germany is typically the growth driver, countries whose economies are not as heavily dependent on fossil fuels from Russia saw stronger growth over the same period, effectively reversing the scenario of Europe’s economic narrative.

France, Italy and Spain – all countries with strong tourism sectors – saw economic growth that exceeded analyst expectations from April to June. The French economy grew by 0.5 percent compared to the first quarter, while Italy’s economy grew by 1 percent and Spain’s by 1.1 percent.

The Baltics, which first reached double-digit inflation in March, remained the region with the highest price levels in July.

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Germany’s annual inflation rate rose to 8.5 percent, from 8.2 percent in June, as further cuts in gas supplies from Russia have raised concerns that already record high energy prices will rise further. Those higher costs, along with government calls to conserve energy and ongoing supply chain problems due to the pandemic shutdowns, have dragged down Germany’s industrial sector.

Economic growth in the eurozone is expected to slow in the coming months as the recovery in services and tourism, driven by the lifting of restrictions surrounding the coronavirus pandemic, slows. Europe could then be faced with the prospect of a recession.

“As of now, we expect GDP to continue a downward trend as the reopening of services slows, global demand declines and purchasing power persists,” Bert Colijn, an economist at ING, wrote in a research note. “We expect this to result in a mild recession from the second half of the year.”

The latest figures appeared to support last week’s decision by members of the Governing Council of the European Central Bank to take a bold step to tackle inflation by raising the three interest rates by half a percentage point, the first increase in more than ten years.

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Economists expect the bank to raise interest rates again at its next meeting in an effort to contain rising prices.

“As inflation shows no signs of cooling in the near term and the economic outlook is not yet derailed, we expect a fresh increase” of half a percentage point when the bank meets in September, Nicola Nobile of Oxford Economics said in a note.

On Thursday, new data showed that the US economy contracted for the second consecutive quarter, raising fears that the country might slip into recession – or may have already begun. GDP fell 0.2 percent in the second quarter, followed by a 0.4 percent decline in the first quarter. With inflation in the United States also soaring, the Federal Reserve has raised its key interest rate by three-quarters in its past two meetings, and more hikes are expected.

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