It is not necessary to fall – Newspaper Kommersant No. 27 (7472) of 02/14/2023

The growth of the European economy this year may be significantly higher than the autumn forecasts – the current estimate of the European Commission assumes an increase in EU GDP by 0.8%, as well as the absence of a recession, including in the first quarter. Earlier, both analysts and EC forecasters did not rule out a recession this winter against the backdrop of a record rise in energy prices. Companies and consumers have indeed reduced their gas consumption, but the fall in energy costs to levels last autumn is expected to support economic activity and ease pressure on inflation.

The European economy will avoid recession this year – growth rates in the EU may be 0.8% this year and 1.6% in 2024, in the euro area – 0.9% this year and 1.5% next, should from the winter forecast European Commission (EC). At the same time, last year’s growth is estimated at 3.5% in both cases. The autumn forecast of the EC provided for a reduction in GDP both in the fourth quarter of last year and in the first quarter of this year.

Despite the energy shock and subsequent record price increases, the slowdown in the third quarter was milder than expected, and in the fourth quarter the EU economy stagnated, but not in recession (GDP was expected to contract by 0.5%). Labor markets are also solid, with the unemployment rate at a record low of 6.1% and business activity indicators indicating an improvement in economic sentiment, which is expected to keep the European economy out of recession in the first quarter of this year.

The improvement in the forecast is primarily due to a decrease in gas prices to a level lower than before the start of the Russian military operation in Ukraine: at the end of January, the gas price at the TTF site dropped to €55 per 1 MWh (the peak in August was above €340 per 1 MWh), while gas prices are still more than three times higher than in 2019, while in the US the cost of gas in January was €8 per 1 MWh.

The decrease in gas prices was facilitated both by a reduction in consumption (in November, total demand was 25% lower than a year earlier) and additional diversification of supplies, as a result, by the end of January, the storage capacity level was 74%, which is only slightly lower than at the beginning of the heating season. season.

The threat of gas shortages now looks less pronounced than a few months ago, but with increasing global energy demand, replenishing storage before winter next year may still be more difficult than current forecast suggests, the likelihood of a new price surge has also increased following the increase in the share of LNG in deliveries, warn the EC.

The effect of the current decline in gas prices is not yet fully reflected in statistics, including inflation. The European oil embargo and the introduction of a price ceiling, in turn, according to the EC, did not cause a shortage of raw materials on the world market, while in the case of the embargo on petroleum products (it entered into force on February 5), previously accumulated stocks should reduce the risks of a shortage.

EU inflation is forecast to fall from 9.2% last year to 6.4% this year and 2.8% next year. In the euro area, price growth may slow down from 8.4% in 2022 to 5.6% in 2023 and 2.5% in 2024. Both indicators have been reduced for this year – in the fall, the commission expected prices to rise by 7% and 6.1%, respectively. In January, the indicator has already slowed down to 8.5% from 9.2% in December (the peak was passed in October – then inflation was 10.7%), month on month the indicator decreased by 0.4 percentage points (pp; energy prices fell by 0.9 percentage points, while food prices rose by 1.4 percentage points).

The EC confirms that inflation has probably passed the peak, but notes the continued growth of the base indicator in January (price growth was noted for 90% of the underlying components of inflation).

Against this backdrop, the ECB will continue to tighten its own monetary policy, which will negatively affect the volume of investment and consumption: according to the regulator, the composite index of the cost of new loans for corporations has already reached 3.41% (at the beginning of last year – 1.5%), for households – 2.94% ( 1.3%). The rapid rise in prices will also affect real incomes, which could further limit consumer activity. The external sector is also not expected to have a stimulating effect on growth.

Despite the high level of uncertainty, the EC believes that the risks to the forecast are balanced: consumption could rise in case of a more pronounced pass-through of lower gas prices in the spot market to household bills. But in the context of the ongoing military operation of the Russian Federation in Ukraine, this decline may be offset by a new wave of price increases, the EC does not rule out. External demand could be higher if China grows faster, but the same factor could support higher global inflation. Longer-term risks for inflation are associated primarily with rising wages.

Tatyana Edovina