While the US economy is gaining momentum, Europe is on a very different path. This is due to the combination of two high interest rates and the prolonged effects of Russia's war in Ukraine, resulting in a prolonged economic slowdown.
Eurozone growth this summer was stronger than expected, contracting by 0.1%. Record high interest rates to fight inflation have slowed economic activity in the region's two largest economies, Germany and France, the European Statistics Office reported on Tuesday.
This anemic pace is in sharp contrast to the United States, where the economy has grown rapidly despite the Federal Reserve's increased interest rates to curb inflation.Expansion of gross domestic product The third quarter was 1.2 percent quarter over quarter, or 4.9 percent annually. This has increased purchasing power due to phenomenal consumer spending and slowing inflation.
The economic downturn reflects the challenges facing policymakers at the European Central Bank, which last week suspended its interest rate hike campaign following signs of weakening in the region's economy. Eurozone inflation fell to 2.9% in October, data showed, also showing the impact of the central bank's interest rate hikes.
Economic output in the 20 countries that use the euro currency fell by 0.1% in the July-September period, reversing moderate growth in the second quarter and extending weak economic activity for nearly a year. Compared to the same period last year, the economic growth rate increased by only 0.1% in the quarter.
The ECB has raised interest rates almost in line with the Fed to counter soaring energy and food prices caused by Russia's war in Ukraine. In the process, central bank governor Christine Lagarde has vowed to slow the economy enough to limit price rises, causing consumers to cut spending and imposing unsustainable costs on many businesses. The EU has repeatedly walked the fine line between avoiding the eurozone's tilt (as it has become) and not tipping the eurozone. Entering a recession.
But ING Bank's senior eurozone economist Bart Koline said: “The energy crisis has hit Europe much harder than the US because the US is not dependent on Russian gas and is an oil producer. ” he said. “This has weighed on activity in the euro area since the end of last year, causing the economy to stagnate.”
Prices at gas stations and supermarkets in Europe are down from double-digit increases just a year ago. Still, European households continue to protect their savings better than American consumers.
The broader global economic slowdown isn't helping either. Europe has been hit by a slowdown in exports, particularly to China, the European Union's biggest trading partner. Countries like Germany, whose economic wealth relies heavily on exports of products from cars to ovens, are feeling the biggest impact.
“Export-oriented Europe is far more exposed to cyclical downturns in global manufacturing than the United States,” said Holger Schmieding, chief economist at Berenberg Bank in London.
ING's Collaine said that while it is unlikely that Europe will fall into a sharp recession, “in addition to the economic impact of rising interest rates, continued economic and geopolitical uncertainty will continue to impact the economy in the coming quarters.” “It will weigh on our activities,” he said.
The ECB suspended its interest rate hike campaign this month on signs that the fight against inflation was starting to bear fruit.
On Tuesday, the Statistics Office said in a separate release that consumer prices in the euro zone rose 2.9% in the year to October, down from a 4.3% rise in the previous month and the lowest level since July 2021. Announced. A year ago, European inflation remained high overall, particularly in food and energy, and consumers were becoming more cautious with their spending.
These high interest rates also restrain household and business activities by raising interest rates on loans and restricting the credit needed for purchases and investments. In some cases, it added more pain to an existing problem.
Germany's economy, Europe's largest, shrank by 0.1% in the third quarter. The country's energy-intensive industrial sector continues to be reeling from a price shock after Russian natural gas supplies to Germany were cut off, pushing up inflation and suppressing consumer spending.
France's economy also lost momentum, growing 0.1% after booming in the second quarter. Consumers sped up spending, but France's manufacturing industry suffered as export demand slumped due to the global economic slowdown. Italy's growth also stagnated.
The performance of the euro area as a whole was distorted to some extent by the sharp decline in growth in Ireland, a major exporter of pharmaceuticals. Pharmaceutical exports have fallen since the end of the pandemic lockdown, with Ireland's summer growth contracting by 1.8% quarter-on-quarter.
The International Monetary Fund said in a briefing this month that Europe is “at a tipping point.” The region has weathered a series of shocks, including the pandemic and the energy crisis.
More people have jobs and wages are rising to keep up with inflation. However, the IMF said food and energy prices remained relatively high, a risk that will likely continue to weigh on growth.
