Europe

War, war, jaw, jaw

Europe is straining from the ongoing war on its eastern flank

The European Union is the international block obviously mostly adversely affected by the war in the Ukraine. However, the two powerhouses of the EU - France and Germany - have both returned to some, limited as it may be, economic growth, though Germany saw economic stagnation in the second quarter after a boost in the first. Additionally, Spain and Italy have also performed reasonably well given global events from pandemic to regional war. In July the French finance minister Bruno Le Maire announced France’s return to growth, with a 0.5% rise in GDP in the last quarter of 2022. Le Maire believes France will meet its target of economic growth of 2.5% this year. Spain saw growth of 1.1%, and the Italian economy expanded by 1%. While France’s growth was largely based on manufacturing and productivity, in both the cases of Spain and Italy, the service sector, especially tourism were largely responsible for the boosted growth.

Some other regional economies performed less well. For instance, Portuguese GDP fell by 0.2% in the second quarter of the year, according to the Lisbon-based National Statistics Institute (INE). Lisbon claimed this was largely due to weaker domestic demand. Still, this was disappointing as Portugal saw relatively strong bounce back growth of 2.5% in Q1 2022. Some Eastern European Baltic economics saw a poor quarter – for instance, Latvia saw GDP drop by 1.4%, and Lithuania saw GDP down 0.4% quarter on quarter.

The major EU bloc-wide issue is inflation. Eurostat, the EU statistical body, announced that the eurozone economy as a whole grew by 0.7% in the second quarter of 2022, accelerating from 0.5% in the first three months of the year. This rather defies earlier expectations of a significant slowdown. However, headline inflation accelerated to 8.9% in July, up from 8.6% in June. Food, alcohol and tobacco were part of this inflationary trend but, obviously given the Ukraine war, the main driver was energy prices, up 40% year on year driven by the Russian invasion of the country. Now the EU awaits developments in the Ukraine and how the European Central Bank will interpret this.

EU exports have taken a few dents – sanctions against Russia leading to a drop off in business for many European companies, and also the port disruptions caused by the zero covid policies in China. Germany has been particularly hit by both of these political issues.

A final factor for Europe is consumer push back. Soaring global energy and food prices have severely squeezed European consumers and businesses who may demand a range of political responses from government subsidies for fuel and food costs as well as rising transportation costs. So much of the next two quarters of the EU’s economy will inevitably depend on both China’s bounce-back rate and the progress of the war in the Ukraine. ●

Major Import Sectors of the EU, 2021

Sector % of imports Machinery and Vehicles 32 Energy 18 Manufactured Goods 25 Chemicals 13

Food and Drink 6

Raw Materials

Other

Total

Source: Eurostat 5 2 100