Inflation, supply disruption stifle eurozone growth

Brussels, Belgium | Xinhua | Weaker economic activity in the Eurozone during the first months of the year will give way to a rebound in the second quarter as the Omicron variant proves milder and governments become wary of imposing strict restrictions, said a Dutch banking company expert.

However, higher inflation, rising energy prices, and global supply-chain disruptions are expected to hamper the euro area’s economic growth, Elwin de Groot, head of macro strategy at Rabobank, told Xinhua.

EXPANDING ECONOMY

“The coronavirus and the restrictions are expected to still have some impact on the economic performance the next couple of months, but given that the vaccination rate is high in Europe and the Omicron variant has seemingly less impact on the health factor, we are going to see more opening up as COVID-19 measures progressively loosen, giving way to a rebound into the second quarter of this year,” said de Groot.

The eurozone is expected to keep expanding over the remainder of the year. “Following the rebound into the second quarter, the euro area economy should be able to continue to grow,” the expert on the eurozone economy said.

Rabobank’s latest forecast predicted the eurozone economy to expand by 3.2 percent in 2022. The International Monetary Fund (IMF)’s latest world economic outlook predicted even higher euro area GDP growth at 3.9 percent in 2022.

“The forecast implies a further slowdown in growth in the first quarter, just avoiding outright contraction, followed by a modest pickup in growth from the second quarter,” Rabobank’s latest analysis suggested.

KEY THREATS TO EUROZONE

However, de Groot pointed to two critical threats to the eurozone economy: global supply chain disruptions and a “sharply increased” inflation, driven mainly by a surge in energy prices.

“We may be close to the peak of the global supply chain disruptions, but the problems are shifting from economies, which were mostly affected last year, like Germany, to other economies such as France,” he explained.

According to Rabobank’s assessment, the economic divergence between member states was quite apparent in the final quarter of last year, reflecting differences in virus containment strategies and, above all, differences in the impact from the global supply chain disruptions. The German economy contracted by no less than 0.7 percent, while the French and Spanish economies grew by 0.7 percent and 2 percent respectively.

“If you look at the European commission quarterly business survey, the problem caused by the global supply chain disruptions has really aggravated in France during the last quarter of 2021,” de Groot said, noting that in Germany, the European Union (EU)’s largest economy, there has been an improvement on this front.

De Groot predicted supply constraints would persist, weighing on the economy of numerous countries. “It will take time to feed through and the supply chain disruptions will continue to weigh on the growth for many countries this year.”

Supply chain bottlenecks are also negatively affecting the growth outlook because they feed into inflation, which has reached record-high levels, largely because of the spike in energy prices.

“Because of the disruptions, inflation, also fuelled by higher energy prices, has increased sharply in all countries. This is one of the key risks this year, explaining why we expect economic expansion at around 3.2 percent. It could have been higher if it weren’t for inflation,” de Groot said.

Following several years of low inflation, the euro area’s annual inflation hit a record 5.1 percent in January 2022, up from 5 percent in December, according to a flash estimate from Eurostat, the statistical office of the EU.

Euro area energy prices increased by a record 28.6 percent from the previous year in January. “If inflation continues to be high that increasingly weighs on the real spending power of households,” he said, noting that surveys show that household spending is slowing.

He explained that disposable income would be under pressure in the euro area, given the time needed to realize higher wage growth.

“Wage increase in Europe needs to come from negotiations of worker unions with employers. This is a slower process, and it will take time before we see higher wage growth in the euro area, which means that with high inflation consumers’ real spending power is reduced,” the expert said.

De Groot predicted “inflation may slow down a bit in the coming months, but not much.” He believed a decisive factor that might cause inflation to rise further is the geopolitical tensions over Ukraine.

“The geopolitical tensions between Russia and the West are already affecting the eurozone economy, because of the high gas and energy prices. If the situation deteriorates, even if Russia doesn’t stop entirely the gas supply … energy prices would increase,” he said.

POSITIVE ELEMENT

A positive element for the euro area economy comes from the growth potential of its southern member states. De Groot pointed to two reasons for this development.

First, there is still a “catching up effect” following the contraction due to the pandemic in the southern European economies, like Spain, Italy and Portugal. “They have more room to recover, as sectors hit hard by the pandemic, such as the travel sector, are expected to grow further, while these economies are not facing significantly tight labor markets, a problem seen mainly by the German and Dutch economies, where unemployment rate is really low, resulting in labor market tightness.”

In December 2021, the euro area’s seasonally-adjusted unemployment rate was 7 percent, down from 8.2 percent in December 2020, according to Eurostat. Germany’s unemployment rate in December 2021 was at 3.2 percent and that of the Netherlands was 3.8 percent. In Spain and Italy, the figure was 13 and 9 percent respectively.

Second, the eurozone’s southern economies are expected to benefit more from the positive contribution of the European recovery fund, called Next Generation EU. Under the scheme, agreed in the summer of 2020 by EU member states to jointly borrow some 800 billion euros (914 billion U.S. dollars), each country will get grants and loans to finance mainly digital and green investments.

“Massive amounts are going to the southern eurozone countries, and they are keen to spending these funds on the digital transition, on greening the economy and because these economies are not yet at their back up potential, this could create a multiplier effect, taking the economies to a higher level and thus leading to higher growth,” de Groot said.

According to the IMF’s world economic growth projections, Spain and Italy are expected to grow by 5.8 percent and 3.8 percent respectively this year.

*****

Xinhua