General

The new crown pneumonia epidemic has not completely subsided, and the impact of the Ukraine crisis has resurfaced, which has seriously hindered the European economic recovery process. Analysts pointed out that the European economy, which is deeply mired in high inflation, is shifting from a low-speed drive to a stage of "hitting the brakes", further increasing the risk of recession.

Compared with the spring forecast data two months ago, the European Commission's summer economic forecast report released on the 14th only maintained the EU economic growth forecast of 2.7% in 2022, and the economic growth forecast in 2023 was lowered from 2.3% to 1.5%. %, the EU inflation forecast for this year was raised from 6.8% to 8.3%, and the forecast for 2023 was raised from 3.2% to 4.6%.

The energy crisis is the biggest dilemma facing the EU right now. The European Union is highly dependent on Russian fossil fuels, and the crisis in Ukraine has driven European headline inflation to record highs. Among the major European economies, the inflation rate in June was 8.2% in Germany, 6.5% in France, 8.5% in Italy and 10% in Spain, all at high levels. Inflation in the Baltic countries is around 20%.

Recently, Russia has drastically cut its gas supply to Europe. The two branches of the main gas pipeline "Beixi-1" were also temporarily closed for 10 days of regular maintenance, which intensified concerns and anxiety in Europe. Analysts expect that if Russia continues to restrict natural gas supply as many European countries encounter high temperatures this summer and try their best to store gas for this winter, it will lead to an aggravated "gas shortage" in Europe. A further surge in natural gas prices will again weigh on European inflation, eroding household purchasing power and closing some energy-intensive companies.

In the context of rising inflation, the pressure on the European Central Bank has increased sharply. To prevent further deterioration of inflation, the European Central Bank had to start raising interest rates for the first time in more than 10 years. It plans to raise interest rates by 25 basis points in July and stop net asset purchases from July 1. However, analysts pointed out that with the end of the European Central Bank's bond purchases, the financing costs of heavily indebted euro zone countries will rise sharply, which will bring the risk of debt crisis. At the same time, the European Central Bank should try to reduce the risk of economic recession caused by monetary policy adjustment.

In addition, the recent rebound of the epidemic in Europe should not be underestimated, which may further disrupt the economic situation. The new subtypes BA.4 and BA.5 of the new coronavirus Omicron strain have contributed to another sharp rise in confirmed cases and hospitalizations of the new coronavirus in Europe. The European Commission's economic affairs commissioner, Gentiloni, said the outbreak remained a significant risk, and a resurgence and new disruption to the economy could not be ruled out.

From a fundamental point of view, there is no hope that the European economy will continue the rebound of last year. The ZEW economic sentiment index in the euro zone fell to -51.1 in July, the consumer confidence index fell to -23.6 in June, and the PMI indexes of the four major euro zone economies, Germany, France, Italy and Spain, weakened further in June. Gentiloni said that the reason why the EU's economic growth forecast for this year has remained unchanged is mainly due to the strong momentum accumulated last year, but economic activity is expected to be relatively sluggish for the rest of this year.

Recently, a number of institutions have lowered their forecasts for economic growth in the euro area, and even predicted a recession in the European economy. Europe faces the highest risk of recession, said Neil Schilling, chief economist at Capital Economics. Inflation triggers a cost-of-living crisis and the potential for gas shortages. Britain and the euro zone are also dealing with inflation at multi-decade highs.

Martin Wahlberg, senior economist at Generali Investments, said: "If Russia completely cuts off gas supplies to the EU, recession in the euro zone will become a new megatrend. The German economy will be hit particularly hard."

The ECB expects the euro zone economy to grow by just 1.3% in 2022 and shrink by 1.7% in 2023 amid severe disruptions to energy supplies and further price spikes. Gentiloni also acknowledged that the EU economy will fall into recession in the second half of this year and economic activity will be suppressed next year under the circumstance that the import of Russian natural gas will be cut across the board and it will be difficult to replace it in the short term.

Affected by multiple unfavorable factors, the exchange rate of the euro against the US dollar has continued to fall recently, hitting a 20-year low, and it once fell below 1:1 on the 13th. Foreign exchange markets are "counting a severe recession in Europe into the euro-dollar trade," Greg Anderson and Stephen Gallo, FX strategists at Canada's BMO Capital Markets, wrote in a note to clients.