I cuts in Russian gas supplies and the consequent surge in prices worsen the forecasts on the inflation front. And in such a scenario, recession could be inevitable. This is the picture drawn by Simon Wells, Chief European Economist di Hsbc.
Wells – according to reports from Milano Finanza – sees Eurozone inflation at 10% in October and on average at 8.3% this year and 6% in 2023 compared to the forecast of 7.6% three months ago and 3.9%. Furthermore, the risks of disruption of the supply chain remain: the drought affecting much of Europe could, in fact, limit the transport of goods along key rivers such as the Rhine, and new lockdowns have been announced in China. There are, however, some signs of easing global supply bottlenecks with prices for a number of commodities falling recently. Price pressures are no longer at their peak, and as far as consumer prices are concerned, the latest weakening of the US (core) CPI data could be a signal of what will happen in Europe, according to economic surveys.
The impact of rising inflation on household incomes
“Now we expect – explains the economist of Hsbc Bank quoted by Milano Finanza – that the aggregate real income of families will drop by about 1% this year and by 2% next year. This is despite the increase in fiscal measures to mitigate the energy squeeze, even if it is largely a transfer of tax receipts which increase with inflation and energy prices, and therefore not an active stimulus that will widen fiscal deficits in the short term ”.
Recession risk in Europe
The Eurozone is moving towards fourth collapse after 15 years of expansion almost uninterrupted until 2008. In light of the compression of incomes and a limited propensity to save, the recession – according to Wells – is probably inevitable. “Now let’s see the GDP of the Eurozone stagnate in the third quarter of 2022 and contract by 0.3% in the following two quarters, before returning to moderate growth in the second half of next year. This implies zero year-on-year growth in 2023, down from the 1.5% previously estimated, below the July consensus of 1.4% and forecast European Central Bank of 2.1% growth, but not as bleak as the 1% contraction predicted by the Bank of England ”. Although the recession is expected to be rather contained thanks to planned fiscal measures and a labor market that appears to remain relatively resilient, with energy rationing still possible, the risks are on the downside. “It is not surprising – continues Wells – that the recession is driven by consumption. The compression of incomes means that consumption is expected to end next year with a drop of 2.4% from the level of 2019. The combined impact of the pandemic and the energy crisis will likely trigger at least half a decade of lost consumption in the eurozone . Even if this assumes that consumption growth will pick up in the second half of 2023 despite the slight increase in unemployment, thanks to the acceleration of wage growth in response to rising inflation and the recovery of consumer confidence ”. Among the four major economies of the Eurozone, the recession will hit Germany hardest, due to its energy mix and a further delay in the recovery of the manufacturing sector. By contrast, Wells sees Spain avoid recession altogether.
Gas rationing possible for industry
The most energy-intensive industries are those of paper, iron and steel, chemicals and, to a lesser extent, those of wood products and non-metallic minerals. Overall, chemical companies consume around 6% of the total energy consumed in the euro area in one year, while the paper and steel industries each consume around 3%. Wells – reports Milano Finanza – hypothesized that the production of more energy-intensive sectors and reduce to about halfwhile the overall consumption of electricity and gas for domestic use decrease by approximately 20%. Based on these assumptions, eurozone GDP growth could decline by around 2.5 percentage points, from just over 3 percentage points in Germany and 2.75 percentage points in Italy, to just under 2 percentage points in France. . The decline will likely be felt especially in the fourth quarter of this year and in the first quarter of 2023.