Inflation hits a record 8.9% in the euro zone, but the economy is improving

LONDON (AP) — Inflation in European countries using the euro hit a new high in July, pushed by higher energy prices powered by Russia’s War in Ukrainebut the economy managed better-than-expected, albeit weak, growth in the second quarter.

Annual inflation in the 19 eurozone countries reached 8.9% in July, an increase 8.6% in Juneaccording to figures published Friday by the statistical agency of the European Union.

During months, inflation has reached its highest levels since 1997, when record keeping for the euro started, European Central Bank to raise interest rates last week for the first time in 11 years to bring prices down.

The Eurozone economy managed to grow by 0.7% from April to July compared to the previous quarter, which contrasts with the contraction in the United Stateswhere fears grow of a recession. The outlook is equally bleak for Europe.

Analysts say that economic growth linked to a tourism rebound could be the last glimmer of good news, with inflation, rising interest rates and a worsening war-fueled energy crisis should plunge the eurozone into recession Later this year.

“This is likely to be as good as it gets for the eurozone for the foreseeable future,” Andrew Kenningham, chief European economist at Capital Economics, wrote in an analyst note.

Growth has already stagnated in Germany, Europe’s traditional economic engine, after being hit by a series of cuts in Russian natural gas used for industry. France staved off recession fears by posting modest growth of 0.5% in the second quarter, while Italy and Spain beat expectations with expansions of 1% and 1.1%, respectively .

Energy prices, meanwhile, jumped 39.7% in the eurozone this month, slightly less than in June due to gas supply problems. Food pricesalcohol and tobacco rose 9.8%, faster than last month’s rise due to rising transportation costs, shortages and uncertainty over Ukrainian supply.

“Another bad inflation reading for July,” said Bert Colijn, senior eurozone economist for ING Bank, adding that there were “no imminent signs of relief.”

The United States also faces high inflation, reaching 40-year highs, but unlike Europe, it has already seen its the economy shrinks for two consecutive quarters. At the same time, the labor market is stronger than before the COVID-19 pandemic, and most economists, including Federal Reserve Chairman Jerome Powell, have said they don’t think the economy was in recession.

Many, however, increasingly expect an economic downturn in the United States to begin later this year or next, much like in Europe.

Europe’s risk is largely linked to its dependence on Russian energy, with Moscow limits natural gas flows that power factories, generate electricity and heat homes in the winter.

More discounts this week via a major gas pipeline to Germany, Nord Stream 1, raised fears that the Kremlin could completely cut off supply. It would force rationing of energy-intensive industries and drive up already record levels of inflation due to soaring energy prices, threatening to plunge the 27-nation bloc into recession.

As European Union governments this week approved a measure to reduce gas consumption by 15% and passed tax cuts and subsidies to ease a cost of living crisis, Europe is at the mercy of Russia and the climate.

A cold winter, when demand for natural gas soars, could reduce storage levels that governments are now scrambling to fill but was made infinitely more difficult by Russia’s cuts.

“With the region’s gas supply now tight and inflation expected to remain elevated for some time, the eurozone is likely to slide into recession,” Michael Tran, deputy economist at Capital Economics, said in an analysis. this week.

While the European Central Bank has started raising rates to calm inflation and expects another hike in September, it has lagging behind other central banks like the Fed and the Bank of England to make credit more expensive, fearing the disproportionate impact of soaring war-related energy prices.

The impact of the recent ECB rate hike on inflation has been “very limited, although it adds to a further cooling of demand in the eurozone,” ING’s Colijn wrote.

“With a recession looming and inflation reaching new highs, the question is how the ECB will react to an economy that is already cooling,” he said.


Barry contributed from Milan.

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