Wintry wind of recession to batter EU

The European Commission has warned that the European Union and eurozone economies are set to contract in what amounts to a technical recession between the end of this year and the first quarter of next year due to soaring inflation fuelled by the energy crisis, among other factors, while inflation will continue to rise next year.

The commission pointed out that the increased uncertainty and costs are expected to push the eurozone and most EU member states into recession in the last quarter of 2022, with the contraction in economic activity continuing into the first quarter of 2023 and a return to growth in Europe expected in the spring. It cautioned, however, that limited demand would still depress economic activity, with full-year growth likely to be just 0.3 percent in 2023, down more than a percentage point from its July forecast.

At the same time, the commission sharply raised its inflation forecasts for this year and next. It expects full-year inflation to hit 8.5 percent in 2022, nearly a percentage point higher than its previous forecast of 7.6 percent. Inflation will still be 6.1 percent in 2023, more than two percentage points higher than the previous forecast of 4 percent. In addition, unemployment will rise to 7.2 percent in the eurozone and 6.5 percent in the EU in 2023.

According to the commission, three countries in the eurozone are expected to see negative growth in 2023: Germany minus 0.6 percent, Latvia minus 0.3 percent and Sweden minus 0.6 percent; Only four countries — Ireland, Malta, Romania and Bulgaria — are expected to grow by more than 1 percent, with the rest at or below 1 percent.

The commission also gave its first economic outlook for 2024, when it expects the euro area to return to growth of 1.5 percent and the EU to return to growth of 1.6 percent.

The Russia-Ukraine conflict has exacerbated Europe's energy crisis and pushed up inflation, while a contraction in financial conditions in Europe has also dented business confidence. Soaring energy prices and rampant inflation are taking a huge toll on Europe. The EU is at a very challenging stage, both socially and economically. The latest data from the EU's statistics office, Eurostat, showed that inflation in the eurozone hit 10.7 percent in October, up 0.8 percentage points from September, another record high and higher than market expectations.

Against this backdrop, the European Central Bank held a meeting on Oct 27 and decided to raise interest rates by another 75 basis points, the second big 75 basis point increase since September 8. The ECB has raised interest rates by 200 basis points this year, raising fears of a recession in Europe.

But, as experts say, Europe's main task now is to maintain price stability and it must use all available means to achieve that goal, ensuring that inflation returns to 2 percent. Therefore, the ECB must continue to raise interest rates to fight inflation even as the chances of a eurozone recession increase.