Europe enters a winter recession, but war fallout clouds its economic future | Popgen Tech
Europe’s economy looks set to avoid the severe shock the region has feared amid the energy crisis stemming from Russia’s invasion of Ukraine. But the region’s medium-term problems look more difficult to solve, leaving Europe facing a battle to retain its industrial core.
Russia’s war against Ukraine and its economic consequences have shaken Europe’s export-oriented business model. Rising energy prices threaten industries at the heart of the continent’s manufacturing system, such as chemicals and metal production. Businesses across Europe are cutting production and beginning to divert investment overseas, including to the US, which is luring foreign companies with hundreds of billions of dollars in subsidies.
Despite the shocks of war and inflation, Europe’s economy has shown surprising resilience. The gross domestic product in the euro currency increased by 1.7% in the first three quarters of this year, compared to just 0.2% growth recorded in the same period in the US. This partly reflects a boom in tourism in southern Europe this year, helped by the return of big-spending American tourists as Covid-19 restrictions eased.
A period of contraction has probably begun. A survey of purchasing managers by S&P Global recorded declines in activity in each of the last three months of the year, but the December decline was the smallest. A survey of German businesses also pointed to a recovery in confidence as the year draws to a close, as did a survey of eurozone consumers.
“We can look to the new year with significantly less pessimism than we expected in late summer,” said Guido Baldi, an economist at the German Institute for Economic Research in Berlin.
The consequences of the war are reshaping Europe’s relations with its biggest trading partners, the USA and China.
The US economy is currently growing solidly, at about a 3% annualized rate according to the Federal Reserve Bank of Atlanta. Its businesses are hungry for advanced engineering goods and machinery manufactured in Europe as the country builds whole new energy networks.
Meanwhile, China’s bumpy exit from Covid, its increasingly authoritarian leadership and its increasing ties to Russia are encouraging some European companies to seek alternative markets and sources of supply.
The European Union’s goods exports to the US grew by almost 30% in the first nine months of this year, compared with just 3% growth in exports to China, according to the EU’s statistics agency. That helped the US overtake China as the bloc’s biggest trading partner for goods. The US is also an increasingly important supplier of raw materials to Europe, particularly liquefied natural gas.
At Amplifon SpA, a Milan-based hearing aid retailer with about 2 billion euros in annual revenue (equivalent to about $2.12 billion), sales in the U.S. have driven growth this year, according to CEO Enrico Vita. US revenue increased by about a quarter in the first nine months of this year, compared with 12% for the company as a whole.
Amplifon has increased the number of stores it operates directly in the US from 50 to 300 over the past three years, partly through acquisitions, and plans further investments there. “The US is definitely a priority for us,” while China is a “medium to long-term project,” Mr. Vita said.
The eurozone economy is likely to enter recession this winter, defined as two straight quarters of contraction, but will grow by 0.5% for 2023 as a whole, according to economists at JP Morgan.
The US economy is expected to grow steadily through the third quarter of next year, and by 1% for 2023 as a whole, driven by household consumption and business investment, according to the forecasts. China’s economy is likely to grow by 4.3% next year, JP Morgan said, although it also warned of a difficult period as Covid spreads widely following the relaxation of China’s strict pandemic controls.
Europe’s relative resilience to a historic energy crisis partly reflects the size of government. Countries in the euro currency have budgeted about €600 billion to help households with their energy bills, according to Bruegel, a Brussels-based research institute. Government spending is helping to support growth in the eurozone this year, but not in the US, according to JP Morgan.
However, the state aid will only provide temporary relief. Rising borrowing costs are putting pressure on highly indebted European governments such as Italy’s to reduce deficits and are also expected to weigh on business spending and investment. Eurozone inflation, at 10.1% in November, is eroding the purchasing power of workers, whose wages are rising by less than 3% year-on-year, according to the EU’s statistics agency.
Natural gas prices in Europe are expected to remain about seven times higher than in the US until early 2024, and two or three times as high by the end of the decade, according to estimates by the German Council of Economic Experts, which is the council of economic experts advise. German government.
The European Central Bank signaled this month that it will continue to raise its key interest rate, currently set at 2%, for several months to combat inflation that is expected to be tougher in Europe than the US
For European industry, how energy prices develop in the next few months will be of critical importance, business executives say. Small businesses in some sectors are struggling to cope with high energy prices, while many larger firms will soon feel the effect after being insulated until now by hedges or long-term contracts, trade groups say.
In Germany, almost one in four chemical companies have moved some production overseas or plan to do so, while 40% have reduced production or plan to, according to the German Chemical Industry Association, a sector that employs around half a million people in Europe’s biggest job. economy.
The disruption in the chemicals sector is beginning to constrain Germany’s entire industrial supply chain as supplies of key products run low, including pigments, carbon and glass fibers, hydrochloric acid, caustic soda, organic silicone compounds and ferric chloride.
Across Germany, energy-intensive factories cut production by about 13% in October compared with the same month a year earlier, although overall German industrial output was flat on the year, according to Germany’s federal statistics agency.
“There are many disadvantages [to doing business] in Germany,” said Toralf Haag, CEO of Voith Group, a mechanical engineering company based in southern Germany with nearly €5 billion in annual revenue. In addition to high energy costs, Mr. Hague listed high taxes, significant new regulations, including around supply chains and insufficient support for research and development.
Voith plans to make about one-third of its future investments in the US, currently the source of about 20%-25% of its revenue, Mr. Hague said. China is also an important market, but Voith expects to see more sales growth in the US, Southeast Asia and Africa, he said.
Directly in the EU, foreign direct investment fell by around two-thirds between 2019 and 2021, while total global FDI increased by 11% over the period, according to EU data.
“We see a lot of evidence of businesses using the capacity they have in other parts of the world and considering reinvestments” overseas rather than in Europe, said Fredrik Persson, president of the Confederation of European Business, a Brussels-based trade group that companies represent. across the continent.
“The US is energy independent, that’s something I think companies put into the equation,” Mr. Persson said.
A Finland-based maker of fast chargers for electric vehicles plans to invest heavily in the US to take advantage of the renewable energy boom, CEO Tomi Ristimäki said. While the US currently has fewer electric cars than Europe, new subsidies under the Inflation Reduction Act could change that, Mr. Ristimäki said. He expects the US to become a similar market for his company to Europe.
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