Swathi Nair

BENGALURU (Reuters), Increasing recession risk in euro region. Euro zone inflation is expected to run hotter for the rest of 2022, and the European Central Bank may increase its deposit rate before year end, according to a Reuters poll.

Although inflation reached a new record of 7.5% for March, it’s still far from its peak. Russia’s ongoing war in Ukraine has continued to drive up energy and food prices. This leads to speculation about higher prices becoming entrenched.

The recovery of the eurozone economy, record unemployment, and tightening policies by nearly all peer central banks mean that the ECB is poised to stop asset purchases in this year’s fiscal year, as well as raise rates for its first time in more than a decade.

The April 1-6 poll found that 41 respondents expected the deposit rate would rise this year from the record low of -0.50%. Thirty-eight of those polled predicted it would happen in the fourth quarter. 11 of the 53 poll participants said it would occur as early as July-September. This is an increase from the six who indicated it in last month’s poll. One person expected that the rate would rise mid-year.

The ECB’s policy room is shrinking, however, as a result of a 30% median probability for a recession in the year ahead and because the Euro zone lies close to Russia-Ukraine conflict, it is the most vulnerable.

Gordon Scott (RBC eurozone economist) stated that there is “a chance the economic effects of war could be somewhat more severe than anticipated, or that things could get worse.” A recession is still a possibility. There’s a 30-40% chance that it will happen in the coming year.

Forecasters, who had predicted that the recovery would continue after businesses reopened following Omicron variant waves in March, have downgraded their expectations for economic growth to 0.4% for the quarter. This is less than half the forecasts made one month ago.

In the fourth and third quarters, it was forecast that growth would be 0.6%. It is predicted that the eurozone economy will grow 2.9% in this year, and 2.3% next year. This compares to 3.8% and 2.5% a month earlier.

Germany is Europe’s most important economy and the growth projections for 2022 have been nearly cut to 2.2%, down from 4.0% in January’s previous quarterly poll. France’s and Italy’s growth were reduced to 3.2% from 4.2%.

The biggest threat to the economy of the eurozone over the next twelve months is a further escalation by the Ukrainian war. Only two economists out of 39 agreed. According to the two economists, the greatest risk for euro zone economy is COVID-19’s resurgence.

For the 10th consecutive poll, inflation forecasts have risen to 7.3% and 6.9% for the third, fourth, and fifth quarters respectively. This is well higher than the ECB’s target of 2.0%.

Graphic: Reuters Poll- Euro zone inflation and growth outlook: https://fingfx.thomsonreuters.com/gfx/polling/xmvjoqyagpr/Reuters%20Poll-%20Euro%20zone%20inflation%20and%20growth%20outlook.png

Inflation forecasts for the three largest economies in the bloc, France, Germany and Italy saw significant increases.

Christine Lagarde, President of the ECB, stated that the bloc is not at risk from stagflation – a prolonged period of low growth and price rises – but only 21 economists (or 55%) saw a very or high likelihood of this happening in the next two-years. Others, however, said the risk was very low.

Around half (18 of 39) of the respondents said that it was only a matter time before wage rises, which is a crucial indicator for second round inflationary effects. 21 others disagreed.

Simon Wells (HSBC’s chief European economist) stated that “a price-wage spiral cannot be ruled out …. High inflation may mean workers will demand higher settlements from unions and members with bargaining power.”

“So far, though, demands have been fairly restrained – though the autumn will be a test with some big bellwether deals likely.”

Graphic: Reuters Poll-Euro zone economic outlook: https://fingfx.thomsonreuters.com/gfx/polling/myvmnqyznpr/Reuters%20Poll-Euro%20zone%20economic%20outlook.png

Euro zone unemployment fell to 6.8% in February. This record-breaking low was only expected to increase slightly. The average Euro zone unemployment for next year will be 6.9%.

(For additional stories in the Reuters global longer-term economic outlook polls packages, click here