Growth in the eurozone economy accelerated in the second quarter of the year, but the region’s outlook is being hit as Russia continues to cut gas supplies.
The 19-member bloc recorded a gross domestic product rate of 0.7% in the second quarter, according to Eurostat, Europe’s statistics office, beating expectations for 0.2% growth. It comes after a GDP rate of 0.5% in the first quarter.
The numbers are in stark contrast to the negative annual readings from the US for both the first and second quarters, as the euro zone continues to benefit from the reopening of the economy after the pandemic.
However, a growing number of economists expect the eurozone to slide into recession next year, with Nomura, for example, forecasting an annual contraction of 1[ads1].2% and Berenberg pointing to a 1% contraction.
Even the European Commission, the executive arm of the European Union, has admitted that a recession could be imminent – and as early as this year if Russia completely cuts off the region’s gas supplies.
Officials in Europe have grown increasingly concerned about the possibility of a gas cut, with European Commission President Ursula von der Leyen saying Russia is “blackmailing” the region. Russia has repeatedly denied that it is weaponizing its fossil fuel supplies.
However, Gazprom, Russia’s majority-owned energy giant, reduced gas supplies to Europe via the Nord Stream 1 pipeline to 20% of full capacity this week. In total, 12 EU countries are already suffering from partial disruptions in gas supplies from Russia, and a handful of others are completely shut off.
European Economic Commissioner Paolo Gentiloni said the latest growth figures were “good news”.
“Uncertainty remains high for the coming quarters: [we] need to maintain unity and be ready to respond to an evolving situation as needed,” he said.
The GDP readings come at a time of record inflation in the eurozone. The European Central Bank raised interest rates for the first time in 11 years earlier this month – and more aggressively than expected – in a bid to bring down consumer prices.
However, the region’s soaring inflation is fueled by the energy crisis, meaning further cuts in Russian gas supplies could push prices even higher.
“Given the challenging geopolitical and macroeconomic factors at play in recent months, it is positive to see the eurozone experiencing growth, and at a higher rate than last quarter,” Rachel Barton, European strategy leader for Accenture, said in an email.
“However, it is clear that continued supply chain disruptions, rising energy prices and record inflation levels will have a long-term impact.”
Meanwhile, Andrew Kenningham, chief economist for Europe at Capital Economics, said Friday’s GDP figures would mark “by far the best quarterly growth rate for some time.”
“News that inflation was again even higher than expected only underlines that the economy is heading for a very difficult period. We expect a recession to start later this year,” he added.
Eurostat also published revised inflation figures on Friday, putting annual inflation at 8.9% in July, up from 8.6% in June.