Thursday, 28 September 2023
BusinessBrussels recognizes stagflation, with an increase in GDP of 0.8% and 5.6%...

Brussels recognizes stagflation, with an increase in GDP of 0.8% and 5.6% in the CPI in the eurozone

Europe cannot circumvent its economic situation and is heading towards stagflation. What have been summer forecasts from the European Commission with some delay lay the foundations for a 2023 of economic stagnation with high levels of inflation. Thus, Brussels has predicted this Monday that the euro countries will close the year with a Gross Domestic Product (GDP) expansion of 0.8% and inflation levels of 5.6%.

These figures show a reduction in the economic outlook for the eurozone compared to the 1.1% growth forecast in the spring projections of the Community Executive last May, although inflation levels remain maintained. Such a retreat does nothing more than respond to the expected contraction of the German economy. And the European Commission expects that the EU’s economic engine will experience a GDP cut of 0.4% this year while inflation closes the year at 6.4%.

The similar dynamic is reproduced with regard to the twenty-seven EU countries, for which Brussels estimates growth of 0.8% and inflation of 6.5% for the closing of this fiscal year. Although the truth is that the Commissioner for Economy, Paolo Gentiloni, has ruled out in statements to Bloomberg talk about stagflation. “It is too early to say that we are in a stagflation framework,” he noted, “our estimate is that there will probably be a rebound next year.”

What the Italian dared to point out, already in a press conference, is that growth is “weaker.” That the fall in industrial production caused by a sharp contraction in the production of consumer goods and insufficient demand have contributed to such a drift. And that growth in the second quarter of the year has been stronger in advanced economies than in other emerging economies such as China.

Eurozone GDP grew by 0.1% between April and June, according to the latest data published by the Eurostat statistics office, which also revised slightly upward the evolution of GDP at the start of the year to bring it to 0.1%, compared to the zero growth estimated at the beginning. With these calculations, the euro countries confirm that they avoided recession, as confirmed by the Commissioner for the Economy.

Inflation, on the other hand, moderated over the summer. Specifically, Food, industrial goods and energy registered a downward path in prices. Meanwhile, inflation in the services sector was more persistent and continued to rise until July. On the other hand, the increase in oil prices and the persistence of underlying pressures on prices slightly raise the inflation forecast for 2024, to 2.9% in the eurozone.

Although Gentiloni has pointed out that inflation levels are declining, he did not want to take this path for granted by highlighting the uncertainty caused by the Russian military invasion. “There is much to do to support sustainable growth“, he assured, and advocated, in passing, for a “prudent” fiscal policy in line with the monetary policy of raising interest rates of the European Central Bank (ECB) to mitigate price levels.

The Brussels estimates are known a few days after The ECB reveals whether it will continue with the increase in interest rates at its meeting on Thursday. For now, everything points to a pause this week to continue with an increase of 25 basis points already in the October meeting. An increase that is expected to be the last of this cycle.

The European Commission notes Germany’s decline

The drift of German GDP is not as optimistic as in the rest of the countries. Brussels projects that the largest economy in the euro will register a decline of 0.4% this year, six tenths less than what it estimated in its spring economic forecasts, and then grow by 1.1% in 2024, which is three tenths less than in the previous calculations.

The German economy is going through certain turbulence, which will translate into a decline in GDP due to structural challenges such as high energy prices or the impact that the Ukrainian war has had on its economy given its high dependence on Moscow’s fossil fuel supply. But added to this is a drop in household consumption as well as exports.

However, the Economy Commissioner believes that “domestic consumption, internal demand and the purchasing power of citizens could improve in the coming months and bring Germany back to the growth trajectory.” Despite the negative outlook, a rise in wages is expected to lead to a moderate recovery in the third and fourth quarters of the year in Germany. “It is a strong economy with tools and possibilities to recover“said the Italian.

While the low levels of inflation in France, especially in 2022, explain why growth expectations this year point to 1% and 1.2% for next year. In any case, Gentiloni considers that The situation between the German and French economies is not so different and specifies that the drift of the first could affect neighboring countries.

In the case of Italy, the fall in domestic demand this year and the 0.4% contraction in the second quarter point to a GDP expansion of 0.9% this year and then advancing 0.8% in 2024 For its part, the GDP of the Netherlands will expand by 0.5% in 2023, which represents a significant downward revision compared to May and whose root lies in the contraction of GDP so far this year. The following year it will grow 1.3%.

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