Inflation hits a record 8.9% in the euro zone, but the economy is improving

LONDON (AP) — Inflation in European countries using the euro hit a new high in July, pushed by rising energy prices fueled by Russia’s war in Ukraine, but the economy has improved. successful-than-expected, albeit meager, second-quarter growth.

Annual inflation in the 19 euro zone countries reached 8.9% in July, against 8.6% in June, according to figures published Friday by the European Union statistics agency.

For months, inflation has been at its highest level since 1997 when record keeping for the euro began, leading the European Central Bank to raise interest rates last week for the first time in 11 years in order to lower prices.

The eurozone economy managed to grow 0.7% from April to July from the previous quarter, contrasting with contraction in the United States, where fears of a recession are growing. The outlook is equally bleak for Europe.

Analysts say economic growth linked to a rebound in tourism could be the last glimmer of good news, with inflation, rising interest rates and a worsening war-fueled energy crisis set to push the area euro into recession later this year.

“This is likely to be as good as it gets for the eurozone for the foreseeable future,” Andrew Kenningham, chief European economist at Capital Economics, wrote in an analyst note.

Growth has already stalled in Germany, Europe’s traditional economic engine, after being hit by a series of cuts in Russian natural gas used for industry. France avoided recession fears by posting modest growth of 0.5% in the second quarter, while Italy and Spain beat expectations with expansions of 1% and 1.1%, respectively .

Energy prices, meanwhile, jumped 39.7% in the euro zone this month, slightly less than in June due to gas supply problems. Food, alcohol and tobacco prices rose 9.8%, faster than last month’s rise due to rising transportation costs, shortages and supply uncertainty Ukrainian.

“Another bad inflation reading for July,” said Bert Colijn, senior eurozone economist for ING Bank, adding that there were “no imminent signs of relief.”

The United States also faces high inflation, reaching 40-year highs, but unlike Europe, it has already seen its economy contract for two consecutive quarters. At the same time, the labor market is stronger than before the COVID-19 pandemic, and most economists, including Federal Reserve Chairman Jerome Powell, have said they don’t think the economy was in recession.

Many, however, increasingly expect an economic slowdown in the United States to begin later this year or next, much like in Europe.

Europe’s risk is largely linked to its dependence on Russian energy, with Moscow limiting flows of natural gas that fuel factories, generate electricity and heat homes in winter.

Further cuts this week via a major pipeline to Germany, Nord Stream 1, have heightened fears the Kremlin could cut off supply altogether. It would force rationing of energy-intensive industries and drive up already record levels of inflation due to soaring energy prices, threatening to plunge the 27-nation bloc into recession.

As governments across the European Union this week approved a measure to cut gas consumption by 15% and passed tax cuts and subsidies to ease a cost-of-living crisis, Europe is at the mercy of Russia and the weather.

A cold winter, when demand for natural gas soars, could reduce storage levels that governments are currently scrambling to fill, but which have been made infinitely more difficult by Russian cuts.

“With the region’s gas supply now tight and inflation expected to remain elevated for some time, the eurozone is likely to slide into recession,” Michael Tran, deputy economist at Capital Economics, said in an analysis. this week.

While the European Central Bank has started raising rates to calm inflation and expects another hike in September, it had followed other central banks like the Fed and the Bank of England in making credit more expensive, fearing the disproportionate impact of soaring war-related energy prices.

The impact of the recent ECB rate hike on inflation has been “very limited, although it adds to a further cooling of demand in the eurozone,” ING’s Colijn wrote.

“With a recession looming and inflation reaching new highs, the question is how the ECB will react to an economy that is already cooling,” he said.

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Barry contributed from Milan.

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