Inflation in European countries using the euro hit a new high in July, pushed by rising energy prices due in part to Russia’s war in Ukraine, but the economy still managed weak growth.
Annual inflation in the 19 euro zone countries reached 8.9% in July, against 8.6% in June, according to the latest figures published on Friday by the European Union statistics agency. Inflation is at its highest level since 1997, when the registration of the euro began.
Energy prices jumped 39.7%, slightly less than the previous month, while food, alcohol and tobacco prices rose 9.8%, faster than the increase recorded on last month.
The eurozone economy, meanwhile, grew from April to June, growing 0.7% from the previous quarter and 4% from the same period in 2021.
This contrasts with the United States, whose economy has contracted for two consecutive quarters, raising fears of a recession with inflation at its highest level in 40 years. But the labor market is still stronger than before the COVID-19 pandemic, and most economists, including Federal Reserve Chairman Jerome Powell, said they don’t think the economy is in good shape. recession.
Many, however, increasingly expect an economic downturn in the United States to begin later this year or next, much like in Europe.
Europe’s proximity to the war in Ukraine and its dependence on Russian energy mean it risks a recession as Moscow chokes off natural gas flows that fuel factories, produce electricity and heat homes in winter.
Further cuts this week via a major pipeline to Germany, Nord Stream 1, have heightened fears the Kremlin could cut off supply altogether. It would force rationing of energy-intensive industries and drive up already record levels of inflation due to soaring energy prices, threatening to plunge the 27-nation bloc into recession.
As European Union governments this week approved a measure to cut gas consumption by 15% and passed tax cuts and subsidies to ease a cost-of-living crisis, Europe is at the mercy of Russia and the weather.
A cold winter, when demand for natural gas soars, could reduce storage levels that governments are currently scrambling to fill, but which have been made infinitely more difficult by Russian cuts.
“With the region’s gas supply now tight and inflation expected to remain elevated for some time, the eurozone is likely to slide into recession,” Michael Tran, deputy economist at Capital Economics, said in an analysis. this week.
Economists’ forecasts vary on the impact on economic output, particularly from country to country, but ING Bank says the hit of a complete Russian gas cut to the 19 countries sharing the euro would be 1 to 3% of GDP in the short term.
“Given that we are already expecting a mild recession, that would be enough to get to a real recession,” ING analysts said in a research note this week.
To combat soaring inflation, the European Central Bank raised interest rates last week for the first time in 11 years by half a point higher than expected. It should be followed by another increase in September.
The ECB had followed other central banks like the Fed and the Bank of England in making credit more expensive, fearing the outsized impact of the war-related spike in energy prices.