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German GDP, Spanish CPI and Can Europe Avoid a Recession?

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Goldman Sachs has been one of the recent major banks to upgrade its expectations for the Euro Zone for the coming year. It had previously expected the shared economy to fall into a recession in the first half of the year. Now, the forecast shows an expectation that the Euro Area will just barely avoid a recession, growing at 0.1% for each of the first two quarters.

The revision of expectations is based on the dramatic drop in natural gas prices through the fall, and China reopening sooner than expected. The bout of warm weather over the last couple of weeks has provided further optimism that Europe will avoid an energy crisis during the winter, as Germany was able to restock its natural gas supplies. Additionally, France brought back on line some of its nuclear power plants, allowing the country to become a net exporter once again.

More room for the ECB?

With inflation only just off double-digits, there is quite a bit of pressure on the ECB to get prices back in line. The ECB expects inflation to remain above target for the next three years. However, high inflation isn’t a tenable situation, as seen in the UK. Inflation in Britain started to rise sooner than in the Euro Area, and has prompted a series of strikes across the country that threaten to either push the country further into recession or increase inflationary pressures.

There has been some industrial action in Europe, with some firms offering concessions in wages. But as people see their purchasing power diminish for a protracted period of time, the labor upheaval seen in the UK (like the energy crisis before it), could be a preview of what could happen in Europe over the winter and into the spring.

It’s not just Europe

Meanwhile, the World Bank almost halved its projections for growth this year. It had previously forecasted that the global economy would grow by 3.0%, but now expects only 1.7%. An important part of the pessimism for the outlook is around China, which is expected to have a difficult start to the year. Europe is one of the major exporters to China, as well as relying on it for materials. The continued disruption as covid rampages through the world’s second largest economy could be expected to have an effect on Europe as well.

The US is also expected to have meager growth in the first half of the year. All of this combines to put the ECB in a difficult spot, not wanting to be responsible for Europe slipping into a recession, even if just technically. But something has to be done about inflation.

The core that matters

A large portion of the headline inflation can be attributed to the increased cost of energy. Now that natural gas prices are coming down, so should the headline CPI figure. But core inflation, the one that matters to the ECB, has actually continued to rise. That might pose additional headwinds for the economy, if the ECB has to raise rates even more to get it under control.

German annual GDP growth is expected to come in at 1.8%, down from the 2.6% registered in 2021. Meanwhile, core Spanish annualized CPI for December is expected to be confirmed as growing to 6.9% from 6.3% reported in November.

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