Europe’s outlook ‘darkening,’ ECB head hedges on recession

Sep 26, 2022, 7:56 AM | Updated: 1:33 pm

FRANKFURT, Germany (AP) — The head of the European Central Bank said Monday that the economic outlook “is darkening” and she expects business activity to “slow substantially” in the coming months as high energy and food prices pushed up by the war in Ukraine sap consumer spending power.

ECB President Christine Lagarde hedged her remarks to the European Parliament regarding whether the eurozone would sink into recession, saying the bank’s baseline scenario was subdued economic growth. But she appeared to qualify that by saying some assumptions in that outlook — such as the remaining supply of Russian natural gas — have been “overridden by events.”

She also mentioned that next year would be “certainly, a difficult year” and that the first three months of 2023 “will most likely be negative, as we believe that the fourth quarter of 2022 will be negative as well.” Two consecutive quarters of negative output are one definition of recession, but Europe’s recession dating committee uses a broader range of data including job figures.

Russia’s invasion of Ukraine “continues to cast a shadow over Europe,” driving up energy prices that are dampening consumer spending and production by businesses hit with higher costs, Lagarde said.

Meanwhile, the strong summer rebound in tourism-dependent countries was fading, while weakening global demand would mean less support for the European economy, which is heavily focused on trade. Higher interest rates from central banks in major economies also would dampen demand from outside Europe.

Lagarde urged governments to target assistance programs to the most needy, saying that across-the-board handouts would not help the fight against inflation. With countries clamoring to help households and businesses with soaring energy costs, she said most of the support announced so far was not sufficiently “tailored, temporary and targeted” and that there was “work to be done” to adjust the approach.

The ECB raised interest rates by three-quarters of a percentage point at its last meeting Sept. 8, the biggest rate hike in its history, and says it will be raising rates at its next several meetings.

It is joining the U.S. Federal Reserve and other central banks in sharply raising interest rates to combat a global outbreak of inflation. The 19 countries that use the euro currency saw annual consumer prices rise at a record 9.1% annually in August, well above the ECB’s target of 2% considered best for the economy.

Many economists are predicting the eurozone will sink into a recession at the end of this year and the start of next year. Lagarde has said, however, that the bank’s baseline case is growth will not turn negative but that a much darker worst-case scenario would include a 2023 recession. That worst-case scenario implies that Russia would cut off the last trickle of natural gas flowing through its pipelines to Europe.

Lagarde said the baseline case, established before Russia cut off the major Nord Stream 1 pipeline to Germany, was for 0.9% growth next year. The darker forecast signals a drop of 0.9%. She said her personal outlook was that the outcome would be “somewhere in between” and that more would be known when new bank forecasts are published in December.

Carsten Brzeski, chief eurozone economist at ING bank, said Lagarde’s recession hedge reflected the conflicting pressures on the bank as it raises rates.

“The recession has become the elephant in the room, pushing the ECB more and more into a position in which it will become difficult to justify hiking rates throughout a recession,” he said.

Russia’s Gazprom has steadily dialed back gas deliveries to a fraction of what they were before the war. European officials say it’s energy blackmail aimed at pressuring them over their support for Ukraine and sanctions against Russia. Some Russian gas is still flowing through pipelines through Ukraine and Turkey.

Europe is more exposed to the economic fallout from the war than other major global economies such as the U.S. or China. That is because Europe relied for years on Russia as a major supplier of oil and pipeline gas — ties that have now come unraveled. Russia has cut off most gas shipments, while Europe is moving to ban most Russian oil imports at the end of the year.

The Paris-based Organization for Economic Cooperation and Development said Monday that it expects the eurozone economy to grow 1.25% this year in the 19 countries using the euro currency and 0.3% in 2023. But it said there were risks of deeper declines in several European economies during the winter months and that the impact of energy shortages could push many countries into recession next year.

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Europe’s outlook ‘darkening,’ ECB head hedges on recession