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Inflation in the EU has updated a record, but GDP growth remained positive

Inflation in the Eurozone in July reached 8.9% year on year, follows from preliminary estimates by Eurostat. The indicator again updated the record, the previous one was recorded in June. A month earlier, inflation was 8.6%.

Despite the acceleration of consumer prices, EU GDP has not yet gone into negative territory. The European economy is growing for the second quarter in a row. In the first three months of 2022, the growth in annual terms amounted to 0.5%, and in the II quarter – 0.7% (relative to the previous quarter), follows from the report of the EU statistical office, published on July 29. Experts expect that the situation for the European economy will develop according to an unfavorable scenario.

Earlier, on July 21, the European Central Bank (ECB) raised its key rate by 50 bp. to 0.5%, which interrupted the 11-year period of zero and negative rates.

Rising inflation

The main components of European inflation continue to be energy, according to Eurostat. According to the London-based ICE stock exchange, gas prices in Europe are above $2,100 per 1,000 cubic meters. m against the backdrop of rising prices for Brent crude up to $ 110 per barrel. At the same time, a significant contribution to inflation in the eurozone began to make an increase in prices for food and services, which, according to Reuters, indicates the expanding nature of inflation.

In France, inflation accelerated from 6.5% y/y in June to a record 6.8% in July. Over the month, consumer prices increased by 0.3%.

Inflation growth in Italy was 7.9% in July, which was a slight slowdown in inflationary dynamics compared to the previous month: in June inflation reached 8%, which was a record for 36 years. At the same time, prices for the most frequently purchased consumer goods in Italy increased by 8.7% in July, follows from the estimates of ITstat experts.

Maintaining high inflation rates for the Eurozone continues to whip up fear of a recession in developed economies. Similar fears have already been expressed by JPMorgan and Goldman Sachs, while Goldman Sachs reported that a recession should be expected in the current quarter. Western experts unanimously argue that the main reason for the acceleration of inflation in developed countries is the conflict between Russia and Ukraine.

Despite the energy crisis and record inflation, GDP continues to grow in the Eurozone countries. Compared to the 1st quarter of 2022, the eurozone GDP grew by 0.7% in the 2nd quarter of 2022, and compared to the same quarter of the previous year, the 2nd quarter of 2022 showed an increase of 4%, follows from the Eurostat report.

Among the eurozone countries, Sweden showed the fastest GDP growth: compared to the previous quarter, its GDP increased by 1.4%. Spain (+1.1% quarter-on-quarter), Italy (+1.0% quarter-on-quarter) and Austria and France (both +0.5% quarter-on-quarter) also took the lead in GDP growth. . The economies of Latvia (-1.4%), Lithuania (-0.4%) and Portugal (-0.2%) showed negative dynamics. Germany’s GDP growth compared to the previous quarter was zero. Although the GDP dynamics of the Eurozone as a whole continues to be positive, the economic growth of European countries shows a slowdown.

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Western analysts expect a slowdown in the economic growth of developed countries. In the June report of the World Bank (WB), forecasts for GDP growth in developed economies were lowered to 2.6% yoy in 2022 (from 3.8% in January) and to 2.2% yoy in 2023 (since January 2.3%). At the same time, in the next 12 months, a recession is expected in European countries, Robert Subberaman, chief economist at the largest brokerage company Nomura, said in early July.

Why is this situation and what will it lead to?

The positive dynamics of GDP in the eurozone still persists and this is the effect of a powerful economic recovery that was observed after the coronacrisis, Irina Ipatova, a leading expert of the CMASF, is sure. In the second quarter of 2021, eurozone GDP growth reached 14%, follows from a report by Eurostat. The rapid recovery of the economy last year has helped maintain high growth rates now, although many experts are already predicting a Eurozone recession next year, Ipatova said. The inflationary situation in Europe as a whole coincides with the American one: European countries provided cheap loans to the population and businesses, which led to a surge in prices, which is now exacerbated by the rise in energy and food prices. The OECD Composite Leading Index for the Eurozone, which fell below 100 in April and reached 99.3 by June, also speaks of a slowdown in economic growth, Ipatova notes.

The ECB is now in a very difficult position, as the eurozone includes 19 countries with different levels of economic development, the expert points out. Along with advanced countries like Germany and France, the ECB should also regulate the economic situation in countries such as Spain, Italy and Greece, which have experienced very severe crisis phenomena in recent years, Ipatova points out. If the ECB starts raising rates sharply, this can greatly harm the economies of these countries and only aggravate the crisis in them, so now it is raising rates more cautiously than, for example, the Fed, Ipatova believes. The national debt of Spain, Italy and Greece is already more than 100% of their GDP, and rising interest rates mean that their payments on public debt are growing, Ipatova adds.

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The data of the Eurostat report on growth is accompanied by an indication that they will still be revised in the future, and we must think that they will be worse, warns Associate Professor of the Department of Finance for Sustainable Development of the Russian University of Economics. G. V. Plekhanov Ayaz Aliyev. The position that Europe occupies in the geopolitical arena leads to an aggravation of the energy crisis, so one should not expect further sustainable growth in the eurozone’s GDP, Aliyev said. In the current situation, the EU economy should only hope for a miracle, he added.

In such conditions, the growth of ECB rates, although it will help in the fight against inflation, will significantly slow down economic growth, so the ECB is delaying the adoption of such a difficult decision, the expert believes. Most likely, the ECB will not go for a sharp increase in rates, but will try to find a compromise in the soft tightening of monetary policy.

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