Europe’s Energy Crunch
Europe Defies Expectations With Help From Plunging Energy Prices
Europe ended January with good news — it’s on course to avoid a recession this year after unexpectedly growing at the end of 2022. More surprise followed on Wednesday with inflation slowing quicker than forecast following a sharp turnaround in energy markets.
Euro area gross domestic product edged up by 0.1% in the fourth quarter, defying economist estimates for a contraction of 0.1%. The region will expand 0.7% this year, and 1.6% in 2024, the International Monetary Fund said in a report on Tuesday.
That will have a lot of politicians and policy makers letting out a sigh of relief. Less than two months ago, Europe was reeling from dire forecasts for a recession sweeping through the region. Industries were shutting down because energy costs were too high, inflation was surging to multi-decade highs, and jobs and livelihoods were at stake. The UK is still facing a barrage of strikes partly as a result of the bleak economic times.
GDP Watch
Euro-area economy unexpectedly grew in final quarter of 2022
But the energy market has dramatically changed. An unusually warm winter and strong imports of liquefied natural gas have helped keep gas inventories at 73% full, about 20 percentage points higher than the 10-year average. Forecasts for a mostly mild February could ensure stockpiles end the winter at least half full, making it easier to replenish them well in time for the next heating season even without the usual Russian supply.
Benchmark gas and power prices have slumped about 60% in the past two months, taking the edge off the energy crunch. A stronger-than-expected economy would give central banks and governments more firepower to tame inflation, according to Jamie Rush, chief European economist at Bloomberg Economics.
“An ongoing squeeze on household spending power means the euro-area economy could yet shrink in” the first quarter, he said. “With energy costs plunging, the big picture is that any winter downturn is likely to be shallow. The economy holding up better than feared means the ECB can stay focused on tackling high and persistent inflation.”
Price pressures are already easing with the inflation rate dropping more than expected on Wednesday. But it remains way above the European Central Bank’s 2% target. The market will be closely watching for clues from the bank this week on monetary policy direction for the rest of the year. An easing of the most aggressive bout of interest-rate increases in the ECB’s history would be the next step in loosening the European crisis.
Euro-Area Inflation Slows More Than Anticipated
...but core numbers stay at record high
Households are still struggling with high costs, and while gas prices have dropped, they remain double the typical levels for this time of the year. Some government aid in the UK, for example, is being pulled back in April, that could saddle businesses with steep bills.
But from where it was in the autumn, Europe has weathered the energy storm relatively well. In the weeks ahead, as the cold days of winter turn warmer, things are starting to look much brighter.
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