Eurozone growth slips as Russia-Ukraine war pushes up energy costs

Written by on April 30, 2022

Warning lights are flashing in the eurozone economy, with first-quarter growth in France stalling and shrinking in Italy, as Russia’s war in Ukraine drives up energy costs across the continent.

Figures from Eurostat, the EU’s statistics body, showed growth in GDP across the single currency area slipped to 0.2% in the first three months of 2022, down from 0.3% in the final quarter of 2021, when Omicron weighed on activity.

City economists had forecast a growth rate of 0.3% for the 19 euro area countries, highlighting the economic risks from the war in Ukraine amid soaring wholesale oil and gas prices exacerbated by the conflict.

Raising the spectre of stagflation as living costs soar while growth in GDP falters, France’s economy unexpectedly ground to a halt in the first three months of the year, recording zero growth as supply chain disruption and higher energy costs held back activity.

Italy’s economy shrank, Spain lost momentum, while Germany rebounded from a contraction in the fourth quarter when Omicron and supply chain problems had weighed heavily on the euro area’s largest economy.

Suggesting a weaker period ahead as the conflict continues to push up the price of energy, hitting net importers of gas across the continent, separate figures for April showed eurozone inflation hit a record high of 7.5%.

Prices jumped by 0.6% in April alone. Energy was the biggest single factor, driving up costs with a 38% year-on-year increase as wholesale prices for oil and gas soared, amid fears over disruption to supplies across the continent as the war continues.

The figures come as the European Central Bank faces pressure to raise interest rates, with inflation more than three times its official 2% target rate.

Economists said the eurozone was at heightened risk of slumping into contraction in the second quarter, raising the risk of recession for several countries as the rising cost of living forces consumers to rein in their spending.

Andrew Kenningham, the chief Europe economist at the consultancy Capital Economics, said: “Manufacturers will take a bigger hit in Germany than in other parts of the eurozone but the increase in energy prices will affect the entire region, as will the fall in export demand and business confidence.”

Tensions over the continued supply of Russian gas to the rest of Europe have risen in the past week as the Kremlin cut off Poland and Bulgaria after Vladimir Putin ordered importers to pay in roubles to sidestep western sanctions. Analysts have warned that an end to Russian gas supply is becoming a growing risk, with Germany expected to be among countries hardest hit given its reliance on Russia for 40% of total imports.

Melanie Debono, a senior Europe economist at the consultancy Pantheon Macroeconomics, said Germany was still expected to grow by 2% this year, although there were mounting risks to the downside. The German economy grew by 0.2% in the first quarter after a contraction of 0.3% in the final three months of 2021.

“An embargo on Russian gas, especially if overnight, poses a real threat to the outlook; it would all but certainly drag the economy into recession, dragging the rest of the eurozone along with it,” Debono said.

The slowdown in the eurozone compares with a 0.4% contraction in the US economy in the first quarter amid a weaker contribution from trade and government spending. The UK economy is forecast to grow by about 0.5% in the first quarter. However, analysts have warned of risks of a summer recession amid a rise in inflation to the highest levels since the 1990s.

TheGuardian Int

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