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Euro Zone Can Escape With a Shallow Recession This Winter - BLOOMBERG

AUGUST 11, 2022

(Bloomberg) -- A euro-area recession is coming this winter as inflation peaks, but the bloc can escape with a shallow downturn if consumers are shielded from the worst of the energy crisis, according to Bloomberg Economics. 

Output is seen shrinking 0.3% in the fourth quarter and 0.2% in the following one, assuming governments offer support to households and businesses and natural gas costs ease next year.

Growth is likely to resume in the second quarter. Inflation, meanwhile, is projected to climb to 9.5% in the final three months of 2022 -- more than expected in June.

“Our forecast assumes a lot goes right this winter,” economists led by Jamie Rush said. “Unusually cold weather, reluctance to share resources, deeper disruptions to French electricity generation or a blowout in sovereign yields as monetary tightening continues could all tip the euro area into a deeper downturn.”

Bloomberg Economics Forecasts for the Euro Area

Read more: EURO-AREA INSIGHT: Recession Looms as Putin Tightens the Screws

While generous fiscal support and a post-lockdown splurge on tourism helped deliver 0.7% expansion for the euro-zone economy last quarter, momentum is set to slow sharply due to multiple crises.

Russia’s war in Ukraine is the main one, raising the threat of energy rationing in the coming months that would further stoke record inflation. But disruptions in supply chains persist and droughts have made some of Europe’s rivers practically impassable.

A downturn won’t stop the European Central Bank from continuing to raise interest rates, according to BE, which predicts another 50 basis-point hike in the deposit rate in September, before officials switch to quarter-point moves.

“With the Governing Council shifting to a hawkish policy stance, that means the threat posed to inflation expectations will trump growth concerns,” said Rush. “The hiking cycle could end in March, when evidence of falling headline and core inflation becomes clearer.” 

BE sees consumer-price growth averaging 5.5% next year, up from a June forecast of 3.2%. The economy is set to grow just 0.4%, compared with 2.1% seen earlier.


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