Half Of The Eurozone Economies Will Enter A Recession This Winter

Russia’s invasion of Ukraine began eight months ago, and Western economies are increasingly suffering from its consequences. Added to the uncertainty of a war conflict is the use of energy as a weapon of war, and all this exacerbates the problems that had been dragging on for months, such as the growth of inflation or the high levels of public and private debt. . None of these issues is likely to be resolved in the short term, which is why the International Monetary Fund estimates that half of the eurozone economies will enter a recession throughout this winter.

In its new economic outlook report for Europe, entitled ‘The fog of war clouds the European outlook’ , the IMF takes it for granted that Germany and Italy will enter a recession at the end of the last quarter of the year and will maintain negative growth at least until March, while Croatia, Poland and Romania will also experience “technical recessions in the second half of 2022”. As a whole, the international organization forecasts that the advanced European economies will grow by just 0.6% in 2023 (0.7 points less than estimated in its July report).

In this sense, the director of the IMF Department for Europe, Alfred Kammer, has summarized the figures underlining that “this winter, more than half of the countries in the eurozone will experience technical recessions, with at least two consecutive quarters of reduction in production”. They will be joined by Croatia, Poland and Romania, with even more pronounced setbacks. Next year, Europe’s output and income will be close to half a trillion euros below the IMF’s pre-war forecasts , a stark illustration of the continent’s severe economic losses from the war. .

In reaching these forecasts, the Fund assumes that the war will continue; that the sanctions against Russia will remain in force and its gas exports to Europe will remain 85% lower than usual; that the price of energy and raw materials would be high and volatile; that falling demand will ease supply chain disruptions; that the pandemic and its economic consequences will diminish in the Old Continent; and that the ECB rate hikes will continue in the coming months.

In this regard, Kammer believes that inflation will remain well above the usual target of 2% – 6.2% for advanced economies and 11.8 for emerging economies, according to the report – slowing growth. And he considers that, although Europe has equipped itself opportunely by replenishing its gas reserves, a greater than expected supply cut or a harsh winter could translate into “energy cuts, rationing and GDP losses of more than 3% in some economies of the East and the center of Europe”.

But it does not finish here. The director of the Department for Europe recalls that inflation could remain at high levels even if the energy situation improves, given that “most of the rise in inflation is the result of the high price of raw materials “, which includes food, especially in the Balkan area.

And all of this will translate into citizens, as the document warns: “Social tensions may intensify in response to the cost-of-living crisis, which will result in an expansionary fiscal stance that could force central banks to further tighten plus monetary policy”, entering a loop that is difficult to get out of.

“Finally, the steady implementation of reforms that improve productivity , ease supply constraints in energy and the labor market, and expand economic capacity – including accelerating the implementation of Next Generation EU programs – remain essential to increasing the growth and ease price pressures in the medium term, while ensuring energy security, accelerating the green transition and countering adverse demographic trends,” recommends the IMF.

Sanctions on Russia are barely effective
The IMF report highlights the scant effect that international sanctions are having on the Russian economy. ” Russia’s GDP is now estimated to fall by 3.4% in 2022 , which is about half of the contraction initially expected,” the document reads. The text explains that the country led by Vladimir Putin has managed to alleviate a large part of the pernicious effects of the sanctions by redirecting its oil sales to third countries, maintaining employment levels thanks to the weight of the public sector, abandoning fiscal discipline and achieving ruble appreciation.

Despite this, the IMF does believe that there will be a negative effect on the Russian economy in the medium term, although they do not dare to quantify it: “A great exodus of multinationals, the loss of human capital, the isolation of global financial markets, complicated access to knowledge and advanced technologies will hamper the Russian economy in the medium term.”

On the contrary, Ukraine will suffer a colossal punishment at all levels. The Fund recalls that, to the loss of life as a result of the conflict, we must add “more than 7.5 million Ukrainians who have left the country, and a similar number has moved within the country.” The international organization estimates that the national GDP fell by 15.1% year-on-year in the first quarter and 37.2% in the second, and marks its forecasts for the year as a whole with a decline of 35% . The sharp declines in exports and imports, and the increase in the fiscal deficit are just some of the terrible economic consequences that the Russian invasion is leaving.