The second quarter of this year saw an acceleration in the euro zone’s economic growth, but as long as Russia keeps cutting back on gas supply, the region’s prospects will suffer.
According to Eurostat, the European Union’s statistics office, the 19-member bloc’s gross domestic product increased by 0.7 percent in the second quarter, exceeding forecasts for a 0.2 percent increase. It follows a GDP growth rate of 0.5% in the first quarter.
The figures show that the euro zone is still gaining from the reopening of its economy following the epidemic, which stands in stark contrast to the negative annualized readings coming out of the United States for both the first and second quarter.
The euro zone is expected to enter a recession next year, according to an increasing number of economists. Nomura, for instance, predicts a 1.2 percent annual contraction, while Berenberg predicts a 1 percent slowdown.
Even the executive branch of the EU, the European Commission, has acknowledged that if Russia entirely cuts off the region’s gas supplies, a recession may be in the works, possibly as soon as this year.
As President of the European Commission Ursula von der Leyen recently claimed, Russia is “blackmailing” the area, officials in Europe are growing more anxious about the likelihood of a suspension of gas supplies. Russia has consistently denied attempting to weaponize its supplies of natural fuels.
Although this week saw a 20% reduction in gas deliveries to Europe via the Nord Stream 1 pipeline, Gazprom, the majority state-owned energy powerhouse of Russia, continued to operate at full capacity. Twelve EU nations currently have partial Russian gas supply problems, and a few more have had their gas supplies entirely cut off.
The most recent growth data, according to European Economics Commissioner Paolo Gentiloni, are “good news.”
“Uncertainty remains high for the coming quarters: [we] need to maintain unity and be ready to respond to an evolving situation as necessary,” he said.
Good news! Euro area economy outperforms expectations in #Q2. Uncertainty remains high for the coming quarters: need to maintain unity & be ready to respond to an evolving situation as necessary https://t.co/ur7wtxIRzW— Paolo Gentiloni (@PaoloGentiloni) July 29, 2022
The GDP numbers were released at a time when the euro zone was experiencing record inflation. In an effort to lower consumer costs, the European Central Bank increased interest rates earlier this month for the first time in 11 years and more sharply than anticipated.
However, the energy issue is what is causing the region’s skyrocketing inflation, so future reductions in Russian gas supply could cause prices to rise much higher.
“Given the challenging geopolitical and macroeconomic factors that have been at play over the past few months, it’s positive to see the eurozone experience growth, and at a higher rate than last quarter,” in a statement via email, Accenture’s Europe strategy lead, Rachel Barton.
“However, it’s clear that persistent supply chain disruption, rising energy prices and record-breaking levels of inflation will have a longer-term impact.”
The Friday GDP report, according to Capital Economics’ Andrew Kenningham, will mark “by far the best quarterly growth rate for a while.”
“Indeed, news that inflation was once again even higher than anticipated only underlines that the economy is heading for a very difficult period. We expect a recession to begin later this year,” he added.