There’s much talk about the U.S. economy falling into recession, but the truth is that Europe faces a higher risk.
“If a recession does materialize, it is more likely to do so in Europe than in the US,” states a recent report from London based consulting firm Capital Economics.
The report cites two major reasons, the first of which is some simple math. Capital estimates Europe’s potential economic growth rate at around 1% a year versus almost 2% for the U.S. That means it would take just far less bad news to sink the European economy into recession than it would to hurt the American economy.
The second problem for Europe is it imports far greater quantities of commodities than does the U.S.
Germany, Europe’s largest economy, is heavily reliant on imports of Russian energy, for instance. It buys approximate one fourth of its oil from Russia and two fifths of its natural gas.
The recent sanctions on Russia is steadily making things hard for Europeans. That’s because many countries are now boycotting purchasing Russian energy, which in turn has sent oil and natural gas prices sky high compared to a year ago.
A barrel of Brent crude recently fetched $101 versus $66 this time last year, according to data collated by TradingEconomics. Likewise, European natural gas recently cost 90 euros ($96) a kilowatt hour, versus 22 euros in late April 2021.
Soaring food prices, many of which are imported into the EU, are adding to the inflation crunch.
Those increased costs are biting into consumer wallets and corporate budgets. The Capital report explains its predicted fallout as follows:
- “This squeeze in real [inflation-adjusted] incomes is a key reason why our Europe team thinks the euro-zone could record small quarterly falls in GDP in the first three quarters of this year.”
A recession is often defined as two back-to-back quarters of declining GDP. Three quarters would mean a long and lingering recession. The good news here is that Capital points to “small quarterly falls,” which would likely indicate Europe suffers a shallow recession rather than a deep one that hit the world at the beginning of the COVID-19 pandemic.
But perhaps the most insightful part of the Capital analysis is not whether there is a recession or not, but rather that the global economy is likely to grow far more slowly than many experts forecast. The report explains the matter as follows:
- “The difference between an economy seeing minascule contraction for two successive quarters, and therefore fulfilling one definition of recession, and flatlining for two successive quarters, and therefore escaping recession, is negligible.
- “The more important point is that, with or without a recession, the performance of the world’s major economies is likely to be weaker than most currently anticipate.”
In other words, anyone counting on growth to boost their stock portfolio might be disappointed in short order.
