European economy is in the doldrums. The Russian-Ukraine war has inflicted a severe blow on the economy pushing it into recession. The five major economies of Europe – Germany, Italy, France, Spain and the UK – caught in a downward growth spiral are reeling under severe inflation. International Monetary Fund has downgraded the growth forecasts of the five economies battered by higher interest rates and inflation. Liz Truss has a tough time ahead as the UK is battling inflation above 10 per cent — the first time in 40 years. She doesn’t seem to have any clue as to how to deal with rising energy bills. The Bank of England forecasts inflation will peak above 13 per cent in autumn after a fresh increase in energy costs, while the economy will fall into a lengthy recession. A host of other troubles such as supply chain disruption, shortages of workers and drought are likely to pose a big challenge to Truss.
The European nations planning to wean them off Russian oil will take years to find an alternative source of energy. Battered by energy crisis, Germany, Europe’s largest economy, is staring at recession as its manufacturing sector is feeling the heat. Economic growth slowed to stall speed in the second quarter and is likely to turn negative in the coming months. “It will need an economic miracle for Germany not to fall into recession in the second half of the year,” said Carsten Brzeski of the Dutch bank ING.
Germany used to meet more than half of its energy needs from the oil supplied by Russia. After Russia declared war on Ukraine, it throttled the supply leaving Germany pushing it to a deep financial crisis. Already squeezed by rising prices, consumers and companies must now grapple with higher interest rates after the European Central Bank lifted borrowing costs for the first time in more than a decade last week. Besides, drought and soaring temperatures have caused a sharp fall in water levels on the Rhine, a key transport route for Germany’s dominant industrial sector.
France is in the grip of a deep economic crisis caused by rising energy prices, supply chain disruptions, geopolitical uncertainties and forthcoming tightened monetary policy.
According to Observatory of Economic Conjunctures, these difficulties will cut into French growth, which could only reach 2.7 per cent in 2022, compared to the 4.2 per cent forecast at the beginning of the year.
Long queues for bread and essential commodities are a regular feature in Italy. Taking into account a decline in consumer spending as households cut back, and less business investment because of weaker demand and increasing cost of borrowing, the European Commission, in its forecast, said Italy will have the slowest economic growth in the bloc next year, just 0.9 per cent.
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