At the highest level since July 2020 the risk of recession soared for the Eurozone economy, against a background of growing concern about its effects energy crisis in the economic activity of the region during the difficult winter season. A development that, if confirmed, will affect the plans of the European Central Bank as well.
In particular, a poll conducted by the Bloomberg agency among leading economists raised the probability of two consecutive quarters of negative growth in the eurozone, within the next twelve months, to 80% from 60% that was in the previous similar poll of the agency. It is noted that two consecutive quarters of negative growth rate constitutes a technical recession.
The Achilles heel for the Eurozone remains Germany, whose economy remains the most vulnerable to the Kremlin’s energy blackmail. All the data show that the German economy will show negative growth rates already in the current quarter.
The difficult winter
Both businesses and households across Europe are scrambling to prepare for the possibility that worsening conditions in the energy sector could lead to mandatory consumption caps. This threat will add to the adverse conditions already created by high inflationary pressures and problems in the global supply chain.
It is no coincidence that the indicators reflecting the business activity and the climate have started to decline since July, with no hopes of recovery in the foreseeable future.
On the inflation front, estimates speak of a “ceiling” of the index at 9.6% in the last quarter of the year, i.e. at levels five times above the safety limit set by the European Central Bank, while the possibility of a retreat seems unlikely of close to 2% before 2024.
The ECB is in a difficult position
The ECB itself is insisting for the time being on its predictions that the Eurozone economy will “freeze”, but will not “turn” into negative territory, which is why it has decided to raise… gears on the front of interest rate increases to first deal with the scourge of inflation.
But its executives appear increasingly concerned about the outlook on both the inflation and growth fronts.
The ECB’s top economist, Philip Lane, who is also considered among the moderate voices in the council, argued that the very large increase in interest rates a few days ago was reasonable, but hinted that the council’s next steps will be smaller, more cautious. However, other executives have not ruled out the possibility of another 75 basis point hike.
Money markets, for their part, expect the board to go ahead with another very aggressive rate hike of 75 basis points in October, beyond which rates will continue to rise, reaching as much as 2% by February 2023.
But it seems that they now consider it more likely that the ECB, after these levels, will raise the handbrake faster than initially expected, waiting to determine the size of the blow that the economies of the region will have received during the winter.
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