Recession Looming in Europe

The collapse of purchasing power that we mentioned in our previous article is confirmed:

"The Wave of Inflation is Rising in Supermarkets" headlines Les Echos. Experts predict a 5% rise in prices at the end of June and between 7% and 10% at the end of the year.

"The Number of Real Estate Loans is Declining" announced La Tribune, under the effect of the rise in interest rates for households who have to face the increase in their fixed expenses. The number of new constructions should be affected by this, and when the building industry goes bad, everything goes bad...

No one should believe that once peace is signed in Ukraine, the price of energy will return to its previous levels. The sanctions against Russia are destined to last. The European Union is trying to do without Russian oil and gas as soon as possible. The new suppliers will not do us any favors- on the contrary. We will have to get out the chequebook because OPEC refuses to increase its production, and U.S. liquefied natural gas (LNG) requires costly installations and a lot of energy to make it liquid. In addition, "energy prices will remain high to finance the energy transition," says the chairman of Engie in Le Figaro. Along with money printing, the energy transition is the other fundamental reason for inflation, with the war in Ukraine adding a third layer.

The increase in commodity prices (energy, minerals, food), the rise in interest rates, and the cost of the energy transition, have resulted in "a sharp decline in potential growth in Europe", as explained by the research department of Natixis. We were already starting from a very low base, which is why we should not hesitate to talk about a recession. The United States will escape this thanks to its fossil resources, which ensure its near independence. But Europe will suffer.

The forecasts are getting gloomier. In Germany, the Bundesbank warns that "in the severe crisis scenario, real GDP [in 2022] would fall by almost 2%", and forecasts for 2023 and 2024 are even more worrying, with a fall of over 4%. The price of raw materials is the main reason for this recession. The forecasts for France and other European countries, which are less well endowed with industry, are also likely to be catastrophic.

Let's sweep aside an argument often put forward against this recession scenario: "But the French economy is creating jobs, proof of its strength!” 66,000 jobs were indeed created in France in the first quarter of 2022 but, as Les Echos points out, "the billions of 'whatever it takes' have maintained employment at the cost of a deterioration in the economy's productivity," pointing further to "the keeping alive of many 'zombie' companies thanks to public money."

Long buoyed by the prospect of post-Covid growth, the financial markets have been seriously stalling in recent weeks. They are realizing that inflation is slashing purchasing power and that consumption - the main engine of the developed countries - is starting to falter. They are beginning to integrate the scenario of a recession.

In fact, only Christine Lagarde does not seem to understand, stating that "stagflation is not the benchmark for the European Central Bank". But we are already there! Stagflation would even be an enviable scenario when we are facing a decline in GDP and general impoverishment. Its denial, its refusal to raise the key rate, and its apathy towards inflation, will prolong the weakening of the euro against the dollar, thus creating an additional cause of inflation (raw materials being paid in dollars, the fall of the euro mechanically increases their price). By groping around, a bit blindly, with a lot of unconsciousness, we are heading towards a recession.