Eurozone is already in recession on energy squeeze, UBS says

THE euro area has already entered a “shallow” recession that’s been triggered by surging energy prices and will last through year-end, according to economists at UBS Group.

The 19-nation economy will shrink by 0.1 per cent in the third quarter and 0.2 per cent in the fourth, the analysts predicted on Thursday (Aug 25) in a report to clients. Despite that, they upgraded their full-year outlook after a strong performance in the 3 months through June.

The growth forecast for 2023 was cut to 0.8 per cent from 1.2 per cent.

“In light of further significant energy-price increases, which imply further pressure on household consumption and fixed investment, we now expect the eurozone to suffer a technical recession,” economists led by Reinhard Cluse said.

A crucial assumption is that natural gas prices will climb further, but there’ll be no severe shortages. Should rationing become necessary, “the economic damage would likely be much worse,” UBS said.

The souring view chimes with data on Thursday on the dwindling confidence among German businesses, as well as surveys this week by S&P Global showing euro-area activity shrinking for a second straight month.

Economists at Morgan Stanley have also turned more pessimistic, predicting a deeper eurozone contraction than previously, starting in the fourth quarter.

“We see a more long-lasting impact of this energy crisis into next year, as we expect higher prices and uncertainty over energy supply will persist well into the 2023-24 winter,” analysts led by Jens Eisenschmidt said. “Not all is gloomy though, and we still think a recovery will follow this weak patch, driven by a pick-up in private and public investment.” BLOOMBERG