EU economy grows for second quarter, recession fears linger

BRUSSELS, Aug. 4 (Xinhua) -- The eurozone's GDP increased by 0.7 percent, while the European Union's GDP grew 0.6 percent in the second quarter of 2022, according to a preliminary flash estimate published by Europe's statistics office Eurostat on July 29.

Despite the growth achieved in the second quarter, some experts believe that the triple pressure of the energy crisis, high inflation and tightening of monetary policy may plunge Europe into a recession.

UNSOLVED ENERGY CRISIS

Since the EU is highly dependent on Russian fossil fuels, the energy crisis caused by Russia's cut of gas supply is currently the biggest challenge to economic recovery in the bloc.

Russia has slashed its natural gas supply to Europe. In Germany alone, gas flows from Russia via the strategically important Nord Stream 1 pipeline were reduced to 20 percent of its full capacity on July 27, Klaus Mueller, president of Germany's Federal Network Agency, has confirmed.

When many European countries encountered high temperatures this summer and tried to store gas for the winter, Russia continued to restrict natural gas supply. This will aggravate the gas shortage in Europe, and the EU's goal of requiring member states to fill at least 80 percent of their gas storage capacity before the winter will be difficult to achieve, analysts have pointed out.

In response to the energy crisis, EU member states reached a political agreement on a voluntary reduction of natural gas demand by 15 percent this winter. Market analysts have underlined that it is unrealistic for Europe to remove its energy dependence on Russia in the short term, and it is also difficult for other countries to immediately meet the energy needs of the European market.

Many European countries have recently announced that they will reopen coal power plants, or introduce measures to support coal power, which may interfere with the green transition of the European economy and adversely affect the EU's response to climate change, they warned.

RED HOT INFLATION

Since the beginning of this year, the inflation rate in the euro zone has continued to rise under the influence of negative factors such as the spillover effect of the Fed's aggressive interest rate hike and the European energy crisis. According to Eurostat, annual inflation for July in the eurozone was up by 8.9 percent, hitting a new record.

European Commission Executive Vice President Valdis Dombrovskis said the impact of the continued rise in energy prices was spreading to other areas, making inflation more widespread.

Maartje Wijffelaars, senior eurozone economist at Rabobank, said that inflation depends largely on changes in energy prices, but will not fall quickly.

Meanwhile, Veronika Roharova, vice president of Developed European Economics at Credit Suisse, said, "We expect only a small boost to tourism, travel and accommodation growth this summer, as real income squeeze will increase rapidly, holding back consumer discretionary spending."

As eurozone inflation continues to rise, analysts say that the European Central Bank's monetary policy is lagging behind the inflation situation, strongly limiting the impact of interest rate hikes on current inflation. Sharp interest rate hikes may increase the risk of economic recession and the risk of debt crisis among members of the euro zone, and the European Central Bank is facing a dilemma when formulating policies.

Spyros Andreopoulos, senior European economist at BNP Paribas, said that as the economy weakens, the window of opportunity for the European Central Bank to continue raising interest rates is closing.

SLOWING EUROPEAN ECONOMY

The European economy, mired in the quagmire of high inflation, is slowing down to the point where there is a high risk of recession.

Andrew Cunningham, chief European economist at Capital Economics, said that the economic data released on July 29 "is as likely to be as good as it will get for the eurozone for the foreseeable future." The European economy is heading for a very difficult period, with a recession expected later in the year as euro zone inflation soars, he said.

Goldman Sachs also lowered its forecast for economic growth in Europe this year, predicting that even if Russia does not completely cut off energy supplies, a technical recession of two straight quarters of negative growth is now likely in the euro zone.

"Uncertainty remains high for the coming quarters: need to maintain unity and be ready to respond to an evolving situation as necessary," tweeted European Commissioner for Economy Paolo Gentiloni on July 29.

In addition, recent waves of COVID-19 in Europe may further disrupt the economic situation. Analysts say the pandemic is still a major risk, and further damage to the economy cannot be ruled out.