The eurozone economy is set to shrink next year as high inflation and potential energy shortages drag down output and trigger a reversal in the fortunes of the labour market, according to a Financial Times poll of economists.
Almost 90 per cent of the 37 economists surveyed by the FT said they thought the single currency zone was already in recession and the majority forecast gross domestic product would contract over the whole of next year.
“Gas markets in Europe remain a key risk,” said Chiara Zangarelli, an economist at Morgan Stanley. “Additional supply disruptions, or a particularly cold winter, could lead to renewed tensions and prices rising again, forcing another round of adaptation and demand destruction.”
Most economists said they thought Europe was past the worst of its energy crisis, sparked by Russia’s invasion of Ukraine. A mild autumn allowed natural gas storage facilities to remain near to full capacity.
However, many fear the prospect of energy rationing could return next year, particularly if this winter is unusually cold, depleting supplies, or if gas flows from Russia are reduced further during 2023.
“The tail risk of gas rationing has likely been avoided for this winter, but the question of energy supply for the next winter is still open,” said Sylvain Broyer, chief economist for Europe Middle East and Africa at S&P Global Ratings.
European countries have managed to lower their dependence on Russian gas imports by turning to Norway, the US and the Middle East, along with switching to alternative energy sources. But economists warn that, without Russian supplies, it will be much harder to refill Europe’s crucial gas storage facilities ahead of next winter.
“Gas storage levels are dropping quickly now,” said Carsten Brzeski, head of macro research at ING Bank. “There is still the risk of an energy supply crisis this winter. Moreover, next winter will be even more challenging.”
The downturn in the economy, combined with significantly higher mortgage costs across Europe, was also expected to trigger a sharp reversal in the region’s housing market. The European Central Bank raised rates by 2.5 percentage points over the course of 2022 and is expected to increase borrowing costs further in 2023.
Last year’s predictions
Many of the economists polled by the FT last year identified higher than expected inflation as the major risk. However, none of them anticipated the scale of the energy price shock that has sent inflation to a record high in the bloc.
On average, they predicted prices would rise by 2.7 per cent this year. Inflation soared into double-digit territory in the autumn, with the ECB recently forecasting it would average 8.4 per cent over the whole of this year. That is well above even the highest forecast made in last year’s poll, which was a 4 per cent prediction by Nick Bosanquet, professor of health policy at Imperial College in London.
The forecasters were also too optimistic on growth. They predicted an expansion of just under 4 per cent growth for 2022, which is well above the 3.4 per cent forecast by the ECB earlier this month.
On average, economists forecast eurozone residential house prices would fall 4.7 per cent next year. Maria Demertzis, senior fellow at the Bruegel think-tank, said house prices “will not continue to increase if we are in a recession and interest rates increase”.
The economists polled by the FT forecast the eurozone economy would shrink by just under 0.01 per cent next year. That is more pessimistic than both the European Commission and the ECB, which predicted the bloc’s economy would grow by 0.3 per cent and 0.5 per cent next year respectively.
Marcello Messori, an economics professor at Luiss University in Rome, said further interest rate hikes by the ECB to counter the “excessive inflation” that was caused by the energy supply shock stemming from Russia’s invasion of Ukraine would “lead to a severe recession in the euro area”.
Inflation in the eurozone is expected to remain above the ECB’s 2 per cent target for at least two more years, according to the economists. On average, those polled expect prices to rise by just over 6 per cent next year and almost 2.7 per cent in 2024.
Those forecasts are lower than those of the ECB, which earlier this month predicted price growth would average 6.3 per cent next year and 3.4 per cent in 2024.
Wage growth is expected to be 4.4 per cent next year, according to the average prediction in the FT poll, which is below the 5.2 per cent forecast by the ECB.
On average, economists forecast unemployment would rise from a record eurozone low of 6.5 per cent in October to 7.1 per cent at the end of next year.