The leaders of several large European companies at once believe that a significant recession is brewing in Europe. Writes about it CNBC.
The continent is particularly vulnerable to the fallout from the Ukraine conflict, in particular economic sanctions and energy supply issues, and economists have been downgrading eurozone growth forecasts in recent weeks.
The eurozone is facing parallel economic shocks from the conflict in Ukraine and a surge in food and energy prices, as well as a supply shock caused by China’s zero-tolerance policy on the coronavirus. This raised concerns about “stagflation” – an environment of low economic growth and high inflation – and a possible recession in the future.
“Of course, we see that a big recession is brewing, but it is only in the process of formation. Due to the coronavirus crisis that we are just about to overcome, there is still excessive demand,” said Stefan Hartung, CEO of German engineering and technology giant Bosch.
“The crisis is still here and you can see that it has hit us hard in China, but in many parts of the world consumer demand has even increased in some areas.”
In particular, Hartung noted continued consumer demand for appliances, power tools and vehicles, but suggested that it would fade.
“This means that for a certain period of time this demand will still be there, even though we see interest rates rise and prices rise, but at some point it will not just be a supply crisis, but a demand crisis. Then, of course, we will be in a deep recession,” he added.
Inflation in the Eurozone hit a record high of 7.5% in March. So far, the European Central Bank has remained more dovish than peers such as the Bank of England and the US Federal Reserve, which have begun raising interest rates in an attempt to curb inflation.
However, the ECB now expects to complete its net asset purchases under its APP (asset purchase program) in the third quarter, after which it will have the opportunity to start tightening monetary policy depending on the economic outlook.
Holger Schmieding, chief economist at Berenberg Bank, said in a note on Friday that short-term risks to economic growth in Europe are skewed to the downside.
“Strengthening lockdowns in China and cautious consumer spending in response to high energy and food prices could easily trigger a temporary contraction in eurozone GDP in the second quarter,” Schmieding said.
“An immediate embargo on gas imports from Russia (highly unlikely) could turn this into a more severe recession. If the Fed is wrong and catapults the US straight from boom to bust (otherwise, but not entirely impossible), such a recession could continue into next year.”
However, Schmieding suggested that the eurozone would only likely go into recession “in the worst case” and that this was not a baseline expectation.
Mark Branson, president of German financial regulator BaFin, said any escalation in Ukraine or further power outages could pose serious risks to the growth of Europe’s largest economy, with industrial sectors particularly vulnerable.
“We are already seeing that in many jurisdictions, including here, growth has fallen to about zero. The vulnerability is also caused by the ongoing Covid-related shocks,” he said.
“We have inflation to fight and it needs to be fought now, so it’s a complex combination of factors for the economy.”
Ola Kallenius, CEO of Mercedes-Benz, also told CNBC last week that the situation in China and the conflict in Ukraine are creating a “challenging business environment” for the German luxury car maker on three fronts.
“On the one hand, we have an ongoing deficit, mostly related to semiconductors. Also, now in China, our largest market, there are new lockdowns that will affect us, but could also affect supply chains around the world, and in addition to that, of course, the conflict in Ukraine, so the business environment is difficult.” he explained.
His comments were echoed by Volkswagen (ETR:VOWG) CEO Herbert Diess, who said the company also faced a “controversial environment” due to Covid, chip shortages and the conflict in Ukraine in the first quarter.
Maersk CEO Soren Skou said the world’s largest shipping company is also monitoring recession risks, especially in the United States, but does not expect them to come to the fore until late 2022 or early 2023.
— When preparing the text, materials from CNBC were used
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