Eurozone recession risk seen rising even as inflation peak near

THE risk of a euro-area recession is growing as the likelihood of natural gas shortages rises and inflation remains at record levels, according to economists polled by Bloomberg.

The probability of an economic contraction has increased to 45 per cent from 30 per cent in the previous survey and 20 per cent before Russia invaded Ukraine. Germany, one of the most-vulnerable members of the currency bloc to cutbacks in Russian energy flows, is more likely than not to see economic output shrink. 

“We assume a recession based on the already implemented oil embargo and the effect of higher input prices on industry,” said Erik-Jan van Harn, a strategist at Rabobank. “The German economy is already slowing down and the trend is clearly downward.”

The rising cost of living is taking an increasing toll on business and consumers who’re emerging from two years of pandemic. Lower shipments of gas from Russia, meanwhile, pose a threat to winter energy deliveries. 

Inflation forecasts were raised from the previous poll, though price growth is still expected to slow to the European Central Bank’s (ECB) 2 per cent target in 2024. Respondents continue to see it peaking in the current quarter. 

The ECB is expected to raise its deposit rate to 0.75 per cent by year-end and to 1.25 per cent at its March meeting. It was previously seen reaching that level only in June. 

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The euro zone “is likely to enter a mild recession in the second half of this year, but this won’t be enough of a drag on demand to return inflation to target, leaving the ECB on a path of gradual rate hikes,” economists led by James Rossiter at TD Securities said. BLOOMBERG