Saturday July 13, 2024

Calamities, inflation, high interest rates hit EU economy

By Sabir Shah
September 01, 2023

LAHORE: Having a combined GDP of approximately 15.8 trillion Euros, the 27 member states of the European Union are not having a comfortable ride, troubled and hit by heavy rainfall, wildfires, high interest rates, soaring energy prices, surging inflation and a resultant recession.

In its August 31, 2023 report, globally acknowledged magazine “Economist” has viewed: “Europe’s summer was a strange mixture of heavy rainfall and wildfires. The continent’s economy was also plagued by extremes. Inflation remained hot: prices rose by 5.3% in August compared with a year earlier. And officials are increasingly worried by the cloudy growth outlook. A recent drop in the Purchasing Managers’ Index (PMI) suggests the bloc is facing recession. Ahead of the next meeting of the European Central Bank (ECB) on September 14, policymakers will be worried by the possible emergence of stagflation (a situation in which low growth is paired with entrenched inflation).”

The 180-year-old British weekly newspaper writes: “ Christine Lagarde, the central bank’s president, recently reiterated her commitment to bringing down inflation and setting interest rates at “sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our 2% medium-term target”. In plain English; ECB would much prefer a “hard landing”, featuring economic pain rather than failing to reduce price rises. The problem is that the ECB risks crashing the plane. Euro-zone inflation is proving as stubborn as the American variety. In Europe, price rises were sparked by increasing energy costs; in America, they were more demand-driven. But in both places, inflation has followed a similar path, with Europe slightly behind. Now the question is whether core inflation, which excludes volatile energy and food prices, will come in to land. So far, it is staying stubbornly high.” The “Economist” maintains: “This is in part because Europe has, like America, so far managed to dodge recession. At the end of last year, when many expected a European downturn, monetary tightening had yet to hit the economy and national governments offered generous handouts in order to counteract the energy shock. The service sector showed decent growth, and industrial order books remained full from the post-Covid boom. Gloom is now spreading across the continent. The global economy is weakening, and order books have plenty of blank pages. State support for households is also running out. Retail energy prices remain higher than before last year’s crisis; real incomes have yet to recover. Higher interest rates have also started to affect the European economy, as intended by the ECB’s policymakers. Construction, which is traditionally sensitive to interest rates, is feeling the pain.” Just a month earlier, on July 31, 2023, renowned American media house “CNN” had opined: “The Euro area economy is growing again, but may struggle to maintain the momentum for the rest of the year. Gross domestic product across the 20 countries that share the euro currency rose by 0.3% in the second quarter, compared with the previous three months, according to an official estimate published Monday. GDP had fallen by 0.1% in the last three months of 2022, and stagnated in the first quarter of this year. Separately, official data showed that the overall rate of inflation continued to fall this month. The consumer price index for the euro area rose by 5.3%, down from 5.5% in June. But core inflation — which strips out volatile food and energy costs — was unchanged at 5.5% in July. And inflation for services and unprocessed food ticked up to 5.6% and 9.2% respectively. The Euro area economy was hit hard last winter by the huge increase in energy prices that followed Russia’s invasion of Ukraine — but data from Europe’s two biggest economies has signaled that a recovery was underway.”