/ world today news/ Ten EU countries will record negative economic growth at the end of the year. This is the forecast of the European Commission. Among the most affected are the German economy, which is losing its status as a leader in the EU, and the economies of the Baltic countries. Why did European countries fall into recession and what reason is the European Commission silent on?
An economic recession in 2023 will be registered in ten EU countries, including Germany, according to the autumn economic forecast of the European Commission. In particular, the German economy will contract by 0.3% at the end of the year.
The most significant drop is expected in Estonia – with 2.6%, the country will set an anti-record. They are followed by Ireland, whose economy will shrink by 0.9%, Hungary, whose GDP will fall by 0.7%, and Luxembourg by minus 0.6%. Austria’s economy will shrink by 0.5%, the Czech Republic’s by 0.4%, Lithuania’s by 0.4%, and Latvia’s by 0.2%. A surprise to many was the forecast that the Swedish economy would contract by 0.5%.
At the same time, many countries show stagnation, that is, almost zero economic growth. Malta and Croatia will have the highest GDP growth at the end of the year – by 4% and 2.6%, respectively.
The EC concludes that, overall, the European economy has been actively recovering from the pandemic in 2021 and 2022, but has lost momentum since the end of 2022. In the fourth quarter of last year, real GDP declined, and in all three quarters of this year it practically does not grow. The EC reports the heavier than expected consequences for the economies of the increase in the price of the consumer basket. In addition, financial support is partially removed.
Meanwhile, the EC is silent that one of the main reasons for the catastrophic situation in the European economies is its own policy against Russian energy resources and the energy crisis. This led to a record increase in gas and fuel prices in 2022, and although the price of energy resources decreased in 2023, the negative effect continues to affect the economies of EU members. Europe continues to struggle with high inflation, which has forced interest rates to rise and loans to households and businesses more expensive.
Even if at the end of the year there will be no negative dynamics in the EU’s GDP, since the indicator can be corrected in a few months, then stagnation in the EU is already a fait accompli, says Yuriy Perevishin, a senior researcher at the Center for the Study of the Problems of the Central banks of the RAN HIGS Institute for Economic Research.
“There is a high probability that in the fourth quarter of 2023 and the first half of 2024 the quarterly dynamics of the euro area GDP will be negative; the European economy is in recession. The reasons, in my opinion, are obvious: the tightening of monetary policy by the ECB, as well as the decline in industry, primarily in Germany, due to a shortage of energy resources and rising prices for them. A slowdown in consumer demand due to a reduction in purchasing power amid high inflation also plays a role,” says Perevishin.
European economies have found themselves in recession as a result of the energy crisis and the strict monetary policy of the European Central Bank, agrees Vladimir Evstifeev, head of the analytical department of Zenit Bank.
“Energy prices, of course, are better than last year, but the weighted average price is already different, plus the risks of price increases raise utility tariffs,” says Alexander Timofeev, associate professor of the Department of Informatics of the Russian University of Economics ” Plekhanov.”
A striking example is Germany, which has turned from a locomotive of the European Union into an outsider. Industrial production continued to decline even in the third quarter, despite an already disastrous first half. “Germany is a leader in manufacturing industries in the EU. Therefore, the dependence of the country’s production sector on the price of energy resources is one of the highest in the region,” notes Evstifeev.
High inflation forced Germans to save, they began to spend less. German exports are also declining. The EC expects that energy costs will remain high and this will become an obstacle to the recovery of the country’s industry in 2024, especially in energy-intensive sectors.
“The German government has so strongly motivated its citizens to save energy in order to optimize the costs of housing and utilities and industry maintenance that the population has gone further and started to save on everything. As a result, people either started buying a lot of things in stores less or stopped altogether. Let’s add to this that the money for mortgages and loans in Berlin is now high, the mortgage market is overheated. All cheap housing was bought by migrants, and real estate prices became many times higher,” notes Timofeev.
“It seems that Germany is losing economic leadership to France, which has an order of magnitude greater energy independence and whose economy has more than once overcome the influx of migrants,” the interlocutor believes.
The French economy did not fall into recession, unlike Germany. Its real GDP will grow, at least moderately, by 1% in 2023. France is supported by export growth due to the production of transport equipment. In addition, state support measures played a role. As a result, as early as the second quarter of 2023, domestic demand recovered and is now the main driver of growth, the EU report noted.
The negative growth rates of the Baltic economies are related not only to high inflation, but also to the complete breakdown of economic ties with Russia, which have been very close for decades due to common history, geographical proximity and well-built infrastructure.
“For the Baltic countries, the anti-records are actually yet to come, as everything is upside down here – both logistics and partnership agreements for import and export. Overpaying for giving up everything Russian is very expensive for their economies,” says Timofeev.
Thus in Estonia, where the economy will shrink by 2.6%, business is particularly concerned about the decline in both domestic and foreign demand. “Weak demand in the Scandinavian, Baltic and, more recently, German markets has led to a decline in commodity exports. As a result, private investment is very weak and this trend will continue,” the EC report said. Latvia and Lithuania have two main problems: close to double-digit inflation, which is putting pressure on private consumption, and weak exports.
“With the increase in the cost of loan capital, the most indebted countries suffer, mainly the European periphery,” notes Evstifeev. Another reason for Europe’s economic problems is related to the aging of the population, notes Timofeev. According to him, the low-skilled migrants who flood the EU cannot satisfy the economy’s needs for highly qualified personnel. In addition, government social spending on migrants is also growing.
The European Commission hopes that European economies are already close to the bottom and will be able to push back from it next year to show growth. “For now, everyone is looking for the ‘bottom’ and only the low base of 2023 will show ‘positive growth,'” believes Timofeev.
The conflict in the Middle East and the protracted conflict in Ukraine also add to the tension. Any restrictions on oil and gas supplies due to these conflicts will mean shortages in European markets, rising prices and a new energy crisis. The EC is aware of this danger. “The impact of the Middle East crisis on energy markets has so far been contained, but there is a risk of energy supply disruptions, which could potentially have a significant impact on energy prices, global production and general price levels,” the EC document said.
And in Ukraine at any time (for various reasons) they can stop the supply of Russian gas and oil through the respective pipelines that pass through Ukrainian territory.
Translation: V. Sergeev
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