Europe braces for recession as economies falter



The ride down may be shallow or steep, but either way, the European Union and Britain could be starting to slide into recession.
The British economy shrank 0.2% over July, August and September compared with the previous three months, the Office for National Statistics reported Friday. It was a decline that is expected to continue and spread to the continent by the end of the year.
Many countries are likely to enter a recession in the last three months of 2022, Paolo Gentiloni, the EU’s commissioner for the economy, said Friday. “The EU economy is at a turning point,” he said. “Recent survey data points to a contraction for the winter.”

But while central bankers in Britain have warned of a “prolonged” recession lasting up to two years, the EU predicted that the 27-member bloc would face a “short-lived and not excessively deep” one.
Indeed, Gentiloni said he expected the EU would end 2022 with better-than-expected 3.3% growth, although that total is likely to significantly weaken next year, to just 0.3%.
The divergent outlooks illustrate how the economic fallout from the pandemic and the Russian invasion of Ukraine are having an uneven impact on the region’s countries.
Britain and the EU are suffering from the twin plagues of rising inflation and slowing or declining growth. The war and retaliatory sanctions against Russia, one of the world’s biggest energy and grain producers, have caused global fuel, food and fertiliser prices to soar. Supply chain disruptions rooted in the pandemic and continuing COVID-19 lockdowns in China — most recently in the manufacturing hub of Guangzhou — have added to the pile of economic problems, as have climate-related disasters.
In Germany, Europe’s largest economy, the annual inflation rate, according to one measure, reached 10.4% in October. In Britain, inflation hit 10.1% in September, the highest level in 40 years, and is expected to rise even more before peaking. Call-in radio talk shows on the BBC are dominated by people who are anxious about being able to afford to heat and light their homes.
“There is a tough road ahead,” Jeremy Hunt, the chancellor of the Exchequer, declared Friday, “one which will require extremely difficult decision to restore confidence and economic stability.”
The national statistics office’s preliminary estimates showed that the slowdown in Britain was broad — including the production and services sectors — and meant that the country’s gross domestic product, or total output, remained below its pre-pandemic level. The drop-off was particularly sharp in September, down 0.6% from the previous month, although that number was affected by the death of Queen Elizabeth II, which prompted widespread, unplanned business closures.
The quarterly contraction was less than expected — economists surveyed by Bloomberg had expected a 0.5% decline — and after the announcement, 10-year British government bond yields briefly dropped before rising somewhat to 3.33%.
A recession is traditionally defined as several months of a significant decline in economic activity.
The Bank of England has emphasised its determination to halt inflation’s upward march by raising interest rates even at the risk of throwing the economy into a recession, although it has signaled that it is unlikely to raise rates as high as traders had expected. Last week, the bank again lifted its key rate, and predicted that the British economy would contract in the second half of this year and continue to shrink until the middle of 2024.
Higher interest rates, which make borrowing money for mortgages and investments more expensive, curb spending by both businesses and consumers and can increase unemployment.
Yet Britain’s economy is also suffering from a series of self-inflicted wounds by the governing Conservative Party. A widely criticised economic plan that Liz Truss, the prime minister at the time, proposed in September, and that included steep, unfunded tax cuts and big spending increases to help households afford rising energy bills, sent financial markets into a tizzy.The political and economic instability that ensued resulted in a stunning policy reversal and Truss’ resignation. Rishi Sunak, the new prime minister, and Hunt are scheduled to announce their economic game plan next week, and it is expected to include tax increases, spending cuts and debt reduction.The package “will reinforce Britain’s grim economic outlook,” Pantheon Macroeconomics predicted.
There is also wide agreement among economists and analysts that Britain’s decision to leave the EU in 2016 was a major and long-lasting blow to its economy.
Very few countries in the EU are expected to fall into the negative growth range next year, but the outlook for Germany, which has been hit hard by the loss of Russian pipeline gas, is grim. The EU estimates that its economy will shrink 0.6% in 2023.
Across Europe, inflation is expected to persist at higher levels than previously forecast. A strong labor market remains what Gentiloni called “a bright spot.”
The picture is darker in Britain, where long-term illnesses are keeping roughly 2.5 million people out of the workforce, leaving employment below what it was before the pandemic.