Europe's Economy: Storms Brewing
Greetings LinkedIn readers! Welcome to the lead story from The Kiplinger Letter, a weekly business and economics forecasting newsletter. Subscribe below for our full reporting on finance, economics, the markets and more.
-----------------------------------------------------------------------
Europe’s economy is in for a rough time.
While recession risks have mounted in the U.S., they’re considerably higher in the group of nations that use the euro currency. A serious downturn is likely to begin there before this year is over, with ripple effects far beyond the continent itself.?
Get a free issue of?The Kiplinger Letter , no information required from you.
Europe’s tourist spots are humming now.?
That should keep its economy growing this summer, though flight delays may limit tourism. The weakening euro is drawing visitors from the U.S. and elsewhere. Airports are mobbed. Hotels are busy.?But the good times won’t last for long.?Inflation and an energy crisis loom large.?
The eurozone hasn’t recovered from COVID as fully as the U.S. economy. Private consumption was still below prepandemic levels earlier this year. A strong tourism season will help close the gap. But once Americans and other foreigners go home after the summer, a bitter reality will settle in.?Now comes the hit from the Ukraine war .?
European inflation is at a 40-year high, much like in the U.S.
领英推荐
Soaring costs of food and energy hit Europe especially hard, given its reliance on imports of Russian oil and gas, and foodstuffs from Ukraine.?Inflation is unlikely to peak in the eurozone before Oct., whereas the U.S. should see the worst of price increases earlier, with June a possible high-water mark.?
Expect the European Central Bank to start raising interest rates next month to tamp down inflation and to support the value of the euro. But it will proceed slower than the Federal Reserve is moving , and will likely halt its rate hikes early next year.?
The biggest threat to Europe later this year: Shortages of natural gas.
Russian gas exports to Europe were already down by 70% in late June. The top pipeline for carrying Russian gas to the continent is closed now for regular maintenance and may not reopen on time, or at all, if Vladimir Putin decides to play hardball.
Cutting off gas flows may be his most powerful weapon against Ukraine’s supporters.?Without Russian gas, European countries simply can’t meet all their needs. Despite crash conservation steps, gas storage facilities aren’t filling up fast enough ahead of the winter heating season. The U.S. is sending all the liquefied gas it can , but Europe lacks the infrastructure to receive enough of it to offset Russian losses.
Come winter, it’s likely that governments there will face a very hard choice.
They must decide whether to cut gas to industrial facilities so that there’s enough to keep people’s homes warm.?Even modest gas rationing is likely to push the eurozone into recession.?
Gas-intensive industries could face large-scale shutdowns. Think glass, steel, chemicals, fertilizer…vital raw materials, in other words. The lost output will affect manufacturers, farmers, and ultimately consumers, around the world.