Europe’s Economy Slows to a Crawl as War and Inflation Take a Toll

Rising prices, fallout from the war in Ukraine and continuing supply chain chokeholds slowed growth around the world in the first months of the year and hobbled efforts by major economies to recover from the pandemic.

The latest evidence came on Friday, when the European Union said the 19 countries that use the euro grew only 0.2 percent overall during January, February and March compared to the previous three months.

One day earlier, the United States announced that its economy had shrunk 0.4 percent over the same period. China, the world’s second-largest economy behind the United States, reported signs of significant weakness this month as another wave of Covid-19 prompted widespread lockdowns.

“The overarching message is that the global growth outlook is souring, and it is deteriorating at a faster rate and in a more serious way than now analysts have been anticipated,” said Neil Shearing, chief group economist at Capital Economics.

There is significant variation in the causes, as well as the forecasts, among the three major economic blocs.

Although total output in the United States contracted, analysts tended to be more sanguine about the American economy’s prospects, noting that consumer spending was strong despite high inflation and that the labor market remained tight. The downturn during the first quarter was now likely the result of one-time measuring quirks.

By contrast, China’s report of 4.8 percent growth in the first quarter masks just how much the economy is suffering from a slump in the real estate industry, overinvestment and pandemic-related shutdowns.

As for Europe, it is much more affected by the war in Ukraine.

The common problem they all face, though, is inflation.

“Growth around the world is evolving at different speeds,” said Gregory Daco, chief economist at EY-Parthenon, but “inflation is present almost everywhere in most sectors.”

Those divergent economic backdrops may cause governments and central banks to choose different, or even conflicting, policies as countries try to slow inflation without tipping into recession.

In the United States, the Federal Reserve is set to raise interest rates to bring down inflation, Mr. Daco said while governments in Europe may end up funneling more money to their citizens to blunt the impact of rising energy prices. And China, they said, is caught in a bind: “They don’t want to let go of their Covid-zero policy, but they realize the drag on economic activity from that policy is massive.”

Even though the current slate of risk factors – like the coronavirus and tensions between Russia and Ukraine – were all present when the year began, the economic outlook then was much brighter. Restrictions related to the Omicron variant of the coronavirus were beginning to ease in Europe and elsewhere, and there were hopes that the movement of goods and supplies around the world was about to pick up.

But Russia’s invasion of Ukraine injected a jarring level of uncertainty and undermined economic confidence. The war and resulting sanctions imposed by the United States, Europe and their allies have aggravated shortages of food, energy and crucially important minerals, disrupting trade and driving inflation to wince-inducing levels.

China’s economy expanded in the first quarter but at a pace that was barely faster than the final three months of last year, underlining more trouble ahead. The government has responded to the renewed outbreaks of Covid with severe lockdowns and mass quarantines, which have kept millions of workers and consumers in several cities at home. Shanghai, the country’s largest city, has been closed for more than a month, while further shutdowns of businesses and residential complexes were announced in Beijing on Friday.

Patrick P. Gelsinger, the chief executive of Intel, the Silicon Valley giant, cited the Shanghai lockdown and the war in Ukraine in warning on Friday that the shortage of computer chips that has bedeviled technology, automotive and electronics companies worldwide for more than a year will continue “until at least 2024.” He made his remarks on a call with industry analysts.

The risks, especially those related to a possible energy embargo and other disruptions caused by Russia’s invasion of Ukraine, have intensified. This week, Russia cut off gas supplies to Poland and Bulgaria. At the same time, the European Union has been inching closer to an agreement to stop the flow of Russian oil.

The impact of an abrupt halt in gas and oil supplies has generated sharp debate. In Germany, which has the largest economy in Europe, the central bank recently warned that a gas embargo would cause the country’s economic output to decline as much as 5 percent this year.

Some economists have offered more optimistic estimates, but Melanie Debono, a senior European economist for the Pantheon Macroeconomics, said a gas embargo would almost certainly throw Germany into recession and probably “drag the rest of Europe down with it.”

During the first three months of this year, Germany’s gross domestic product – the broadest measure of economic output – grew 0.2 percent.

“The economic consequences of the war in Ukraine have had a growing impact on the short-term economic development since late February,” the Federal Statistics Office in Germany said on Friday.

Across the eurozone, growth varied. The economy in Spain performed slightly better than other European countries’, growing 0.3 percent over the same period. Still, the improvement was much smaller than the 2.2 percent recorded in the last quarter of 2021.

In France, where Covid restrictions remained in place for much of the first quarter, growth came to a dead stop. In Italy, GDP fell 0.2 percent from the previous three months.

“Clearly the picture for the first quarter is one of pretty weak growth,” said Ángel Talavera, head of European economics at Oxford Economics. “Consumer confidence has tanked everywhere pretty sharply,” he noted, adding that household spending weakened as wages failed to keep pace with inflation.

Average growth among the 27 countries that make up the European Union was 0.4 percent in the first three months of 2022, according to Eurostat, the European Union’s statistical office, twice the figure reported for the eurozone.

Inflation has been a persistent thorn, rising to an annual rate of 7.5 percent across the euro area in April from 7.4 percent in March, Eurostat said.

Food and other prices rose sharply. Although energy prices fell 3.7 percent this month, they are still more than a third higher than last year. “There is a squeeze in real incomes for households,” Ms. Debono of the Pantheon said.

Rising inflation could test the resilience of the American economy as well. During the first quarter of this year, consumer prices rose at a 7 percent annual rate, the fastest in four decades. Taking inflation into account, after-tax incomes dropped for the fourth quarter in a row.

Even before this latest round of measurements, intense uncertainty had dimmed forecasts. Last week, the International Monetary Fund revised its estimate of global growth to 3.6 percent from the 4.4 percent it predicted in January. Its estimate for the eurozone declined 1.1 points to 2.9 percent for the year.

Russia’s invasion of Ukraine “will have severe economic consequences for Europe, having struck when the recovery from the pandemic was still incomplete,” the IMF said in its most recent regional outlook. “The war has led to large increases in commodity prices and compounded supply-side disruptions, which will further fuel inflation and cut into households ‘incomes and firms’ profits.”

The outlook for the rest of the year may darken further.

“Overall, 2022 is going to be a year where growth is going to be significantly weaker than most analysts expect,” said Mr. Shearing of Capital Economics.

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