The eurozone is expected to hit slightly above zero growth in the second quarter, but economists expect the bloc’s economy to deteriorate steadily over the next year as recession risks loom.

Eurostat’s first estimate of second-quarter gross domestic product, released on Friday, is expected to show an expansion of 0.1% from the previous quarter, according to a Reuters poll. It marks a sharp deterioration from growth of 0.6% in the previous three months and would be the weakest performance since a spike in coronavirus infections and restrictions dragged the bloc into a short recession at the start. of 2021.

Russia’s invasion of Ukraine in February has driven up energy and food prices, eroding consumers’ purchasing power while threatening to trigger an energy crisis that will leave manufacturers and households struggling. runs out of gas over the coming winter. Political instability in Italy ahead of the September elections adds to concerns about the bloc’s prospects.

“It’s like watching a car crash in the making, a slow-burning crisis,” said Katharina Utermöhl, senior European economist at German insurer Allianz. “Unlike the pandemic, there is unlikely to be a marked rebound next year.”

A positive point is tourism and hospitality. The eurozone economy is expected to be boosted by more people taking advantage of the reduced coronavirus restrictions to go on vacation or eat out this summer, as they spend some of the extra money they have saved during the pandemic.

But this boost will likely be snuffed out by growing household concerns about the rising cost of living. Most eurozone consumers are feeling the pinch because their wages have not kept pace with inflation, now at a record high of 8.6%, which has made them worse.

“We expect only a slight boost to growth in tourism, travel and accommodation this summer as the squeeze on real incomes gathers pace, dampening consumer discretionary spending,” said Veronika Roharova, Head of Economics for Developed Europe at Credit Suisse.

Russian energy group Gazprom said this week that flows through its main Nord Stream 1 gas pipeline to Germany have been halved to around a fifth of normal levels since Wednesday due to maintenance, heightening fears that Moscow is arming Europe’s energy supply. Gas prices in Europe jumped 30% in the first two days of this week. They have increased ninefold over the past year.

A prolonged reduction in Russian gas flows to Europe could prevent the region from sufficiently filling its storage facilities ahead of this winter’s heating season, forcing supplies to be rationed for large industrial users.

A complete stoppage of flows “could force energy rationing, affecting key industrial sectors, and sharply reduce growth in the euro area in 2022 and 2023”, the IMF warned on Tuesday as it cut its growth forecasts. German next year by 1.9 percentage points to 0.8%, the largest deterioration of any country. Continuing, the fund expects the euro zone to grow by 2.6% this year and 1.2% next year.

The EU has set a target for most countries to reduce their gas consumption by 15%. The German government this week urged households and businesses to save even more and Berlin plans to let energy companies pass on 90% of their higher costs to customers. “We are in a serious situation,” said Robert Habeck, German Economy Minister. “It is time for everyone to understand this.

Government measures to reduce fuel, electricity and public transport prices have probably contained inflation. But consumer prices are still expected to have hit a new eurozone record of 8.7% in July according to Eurostat figures released on Friday.

Line graph of the Harmonized Index of Consumer Prices (annual change in %) showing that inflation has reached an all-time high in the euro area

Higher prices were blamed for a series of dismal economic data. These include the first drop in business activity in the euro zone for 17 months, as indicated by the latest S&P Global survey of purchasing managers, and the drop in German business confidence. to a two-year low, as measured by the Ifo think tank’s monthly survey.

Meanwhile, consumer confidence fell to a record low this month, according to the European Commission’s monthly survey.

Banks are also reducing the supply of loans to households and businesses in the euro zone – a trend that is expected to accelerate after the European Central Bank raised interest rates for the first time in more than a decade last year. last week.

The deteriorating outlook has already prompted investors to bet that the ECB will stop raising rates much sooner than they expected just a few months ago.

The yield on German 10-year bonds – a benchmark for eurozone interest rates – fell below 1% on Tuesday for the first time since May after falling from an eight-year high of 1.77 % of last month.

“The window of opportunity for the ECB to continue raising rates is closing as the economy weakens,” said Spyros Andreopoulos, senior European economist at French bank BNP Paribas.

The nightmare scenario for the ECB and governments would be stagflation, with an interruption in Russian gas supplies driving the eurozone into recession while the energy crisis and a weaker euro continue to push prices higher.

On Wednesday, Goldman Sachs lowered its forecast for the region, saying a technical recession of two consecutive quarters of negative growth this year was now more likely than not, even if Russia had not completely cut the economy. energy supply. A more pronounced slowdown was likely “in the event of an even more severe disruption in gas flows, a new period of sovereign stress or a US recession”.

Credit Suisse’s Roharova predicted eurozone GDP would fall between 1 and 2% next year if Russian gas was cut, while inflation would remain well above the ECB’s 2% target for at least a year. “It is possible that inflation will remain high or only gradually decline even if growth weakens,” she said.

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