Euro area recession now looks almost inevitable to economists

FRANKFURT – The risk of a euro area recession has reached its highest level since July 2020 as concerns grow that a winter energy squeeze will cause a slump in economic activity.

Economists polled by Bloomberg now put the probability of two straight quarters of contraction at 80 per cent in the next 12 months, up from 60 per cent in a previous survey. Germany, the bloc’s largest economy and among the most exposed to cutbacks in gas supplies, is likely to shrink from as early as this quarter.

Households and companies in Europe are bracing themselves for the possibility of energy rationing after Russia throttled gas shipments to the region and are already contending with record-high inflation rates and other supply bottlenecks. Business surveys signal activity has been contracting since July, with few signs of improvement in the near term.

Inflation is now expected to peak at 9.6 per cent in the final three months of the year, almost five times the European Central Bank’s (ECB) goal. Respondents do not see it approaching the 2 per cent target until 2024.

While ECB officials predicted the euro area economy will only stagnate, not contract, when they updated policy this month, they have increasingly sounded the alarm over the region’s growth and inflation outlook.

President Christine Lagarde and her colleagues have justified larger hikes as a sign of their determination to tame price growth, though economists consider their time is running out to take such actions.

Respondents now see the ECB pausing its rate-hiking cycle sooner but lifting interest rates higher to a peak of 2 per cent for the deposit rate by February. More than half expect a 75 basis-point increase at the ECB’s next policy meeting in October.

Chief economist Philip Lane said last week that the ECB’s unusually large interest-rate hike this month was “appropriate”, while signalling that future steps are likely to get smaller. Other ECB officials told Bloomberg after the latest decision that they were not ruling out a further 75 basis-point hike. BLOOMBERG