aafter three Years of pandemic lockdowns, reopening booms, war, dead-end supply chains, and budding inflation, European policymakers believed that 2023 would be the year the old continent returned to a new normal of decent growth and inflation below 2%. The European economy is already stabilizing. Unfortunately, the new normal is much uglier than economists expected.
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Start with the positives. The eurozone has proven remarkably resilient, given the shock of the Russian invasion of Ukraine and the energy crisis. Gas is now cheaper than it was on the eve of the conflict, after price hikes last summer. Governments have not been forced to ration energy as initially feared, in part because of the unusually warm weather. Headline inflation, after hitting a record 10.6% in October, is declining.
Nor did the industry pick up, as doomsayers expected, because of the cost of fuel. In Germany, energy-intensive factories have seen output drop by a fifth since the war began, as imports have replaced domestic production. But production overall fell just 3% by the end of the year, in line with the pre-pandemic trend. Last ifo The survey shows that manufacturers are as optimistic as they were before covid-19.
Although the German economy contracted slightly in the last quarter of 2022, the eurozone defied recession expectations. According to the European Commission’s latest forecast, the bloc will avoid contraction in this quarter as well. Recent opinion polls support this prediction. The widely watched Purchasing Managers’ Index (PMI)PMI) in recent months, indicating a more rosy picture emerging in manufacturing, especially services.
Economic stability keeps people in jobs. The number of workers across the bloc rose again in the last quarter of 2022. The unemployment rate reached its lowest level since the advent of the euro in 1999; In surveys, companies indicate their appetite for new workers. Jobs keep people spending. Despite higher energy prices, consumption contributed half a percentage point to quarterly growth in the second and third quarters of 2022. In many countries, “the energy shock takes time to affect consumers because higher prices are passed on only after a delay,” he added. says Jens Eisenschmidt of Morgan Stanley. “Meanwhile, financial assistance from governments has helped families spend.”
The question now is how long they will keep spending. Households are starting to tighten their grip in the fourth quarter of 2022. In Austria and Spain, which are detailed gross domestic product Numbers available, consumption lowered quarterly growth by a percentage point. Retail trade in the Eurozone declined by 2.7% in December compared to the previous month. Government publications and price caps will be withdrawn this year. Depreciation can become an issue.
Meanwhile, inflation is proving stubborn. “In the European Union We have 27 different ways in which wholesale energy prices are passed on to consumers, which is a predictable nightmare,” a commission official sighs. Some price pressures may still be in the way – such as in Germany, where energy prices in January rose 8.3% from Dec. Even if wholesale prices stabilize at current low levels, household prices may turn out to be erratic.
A strong job market in Europe may lead to an increase in inflation. Rising prices and labor shortages, which are likely to worsen as the elderly retire and fewer young people enter the labor force, drive up the demand for wages. In the Netherlands, wages jumped 4.8% in January, compared to a year earlier, after increasing just 3.3% in 2022 and 2.1% in 2021. Germany’s public sector unions threaten more strikes. They want a whopping 10.5% increase, which could set the tone for comrades elsewhere.
Data from Indeed, a job site, shows that wages in the eurozone tend to follow core or “core” inflation. It shows no sign of softening. The consumer price index, excluding food and energy, rose 7% in the year to January. Services, in particular, are facing soaring costs, according to PMI Survey, which may lead to further price increases.
This leaves the ECB with little choice but to keep interest rates high. Markets expect it to rise from 2.5% to 3.7% in the summer. So financing businesses and households will become more expensive, which hits investment. Credit standards are already being tightened, according to the bank’s lending survey. Most of the impact of critical tightening has yet to be felt, Eisenschmidt argues.
The eurozone may have escaped recession so far, but its outlook – stubborn core inflation, high interest rates and a weak economy – is not satisfactory. the imf expects growth of 0.7% in 2023; The committee expects 0.9%. Even this may be optimistic. America faces equally stubborn inflation, and China’s reopening hasn’t provided much support for the bloc. Welcome to the grim new normal. ■
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