Europe Watches Its Economic Recovery Fade Into the Distance
When the war began in the Middle East and energy prices soared, Europe braced for a sharp, short economic shock.More than three months later, the region is settling in for a period of higher prices and weaker growth that could last much longer than expected.For Europe, the recovery from the last energy shock just a few years ago has been cut short in its early stages.
The economic drag is now forecast to last into next year as higher energy costs drain money from public budgets, sapping investment for more productive uses.Consumers would be left increasingly nervous about spending.Russia’s invasion of Ukraine in 2022 cut Europe off from a critical source of natural gas, and inflation raced into the double digits.
Policymakers responded by aggressively raising interest rates to thwart price growth, but that also sharply restrained the economy.The concern today is a more subtle, but still adverse, economic hit: noticeably higher inflation and interest rates into next year at least.“A short-term shock is being extended in time,” said Mariano Cena, senior European economist at Barclays.The longer the disruption to energy supplies from the Persian Gulf goes on, the worse the effects get, he added.Initially, after U.S.
and Israeli forces attacked Iran, and Iran responded by closing off the Strait of Hormuz, the expectation was for what economists call a V-shaped impact, with a big but short drop in growth and a strong rebound, Mr.Cena said.
Now, it’s more U-shaped, where the economy is weaker for longer and the recovery is slower.Barclays recently halved its forecast for European growth this year to 0.7 percent, with just a meager pickup to 0.9 percent next year.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access.
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