European inflation hits 8.9%, but economy grows

Euro banknotes lie on a table in Munich, Germany, on March 30, 2022. (AP Photo/Matthias Schrader)

Inflation in the European countries using the euro currency soared to another new high in July, driven by rising energy prices spurred by Russia's war in Ukraine; nonetheless, the economy still managed better-than-anticipated, albeit modest, growth in the second quarter.

According to data released Friday by the European Union's statistics agency, annual inflation across the 19 countries jumped to 8.9 percent in July, up from 8.6 percent in June.

As a result, the European Central Bank raised interest rates last week for the first time in 11 years and signaled a further increase in September.

Gas supply concerns led to a 39.7% increase in energy prices in July, which was only marginally less than the previous month. Prices for food, alcohol, and cigarettes increased by 9.8 percent, a greater increase than the last month due to higher transit costs, supply shortages, and supply uncertainty in Ukraine.

"Another ugly inflation reading for July," said Bert Colijn, senior eurozone economist for ING bank, adding that "no immediate sign of relief" was apparent.

The GDP of the eurozone expanded by 0.7% from April to June compared to the previous quarter, despite stagnation in Germany, Europe's traditional economic engine. France averted a recession by achieving modest growth of 0.5 percent, but Italy and Spain outperformed expectations with 1 percent and 1.1 percent growth, respectively.

Economists cited the recovery in tourism following the COVID-19 outbreak, with crowded airports and airlines causing travel disruption this summer.

Analysts predict economic growth to be the last gleam of good news, with inflation, increasing interest rates, and the deepening energy crisis pushing the area into a recession by the end of the year.

"This is likely as good as it will get for the eurozone in the near future," Capital Economics' chief Europe economist Andrew Kenningham wrote in an analyst note.

Europe's development contrasts with that of the United States, whose economy has declined for two consecutive quarters, prompting fears of a recession as inflation reaches its highest levels in four decades. However, the job market is healthier than before the COVID-19 outbreak, and most analysts, including Federal Reserve Chair Jerome Powell, do not believe the economy is in recession.

Like Europe, many anticipate a U.S. economic slowdown to begin later this year or early next year.

Europe's risk is mainly connected to its reliance on Russian energy, as Moscow restricts natural gas flows that power companies generate electricity and warm homes throughout the winter.

This week's reductions across the main pipeline to Germany, Nord Stream 1, have increased concerns that the Kremlin may cut off supply. This would necessitate rationing for energy-intensive industries and exacerbate the already record-high inflation caused by skyrocketing energy prices, threatening to send the 27-nation bloc into recession.

While European Union countries this week agreed on a measure to reduce gas consumption by 15% and enacted tax cuts and subsidies to alleviate a cost-of-living problem, Europe remains at the mercy of Russia and the weather.

A harsh winter, when natural gas demand spikes, could deplete storage levels that countries are scrambling to replenish, a task that has become impossible due to Russia's cuts.

"With the region's gas supply now reduced and inflation expected to remain elevated for some time," said Michael Tran, an assistant economist at Capital Economics, in a study released this week.

While the European Central Bank has begun hiking interest rates to combat inflation, it lagged behind other central banks, such as the Federal Reserve and the Bank of England, in making credit more expensive out of concern for the disproportionate impact of rising oil prices due to the conflict.

The impact of the ECB's last rate hike on inflation was "extremely modest," but it did contribute to a further deceleration of demand in the eurozone, "said ING's Colijn.

"With a recession looming and inflation reaching new heights, the question is how the ECB will respond to a cooling economy," he said.

Publish : 2022-07-29 16:52:00

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