Economy

Eurozone Risks Looming Recession, Stagflation — Bank of Finland Governor

While Central banks across Europe have attempted to rein in galloping inflation by tightening monetary policy and raising interest rates, this move dampens economic growth as rising borrowing costs spur companies into slashing investment and compel households to limit spending.
Sputnik
Olli Rehn, the governor of the Bank of Finland, has estimated that the economic outlook in the Eurozone has notably deteriorated this autumn, in effect confirming the risks spelled out by the European Central Bank (ECB).

“Due to unusually high uncertainty in the energy supply, the likelihood of a recession and even stagflation has, in my view, increased substantially in recent months and weeks,” Rehn said at an event hosted by Citigroup in the US, as quoted by the newspaper Helsingin Sanomat.

Earlier in September, the ECB gauged that the Eurozone economy could contract by 0.9% in 2023 should supplies of energy such as natural gas and maritime-transported oil from Russia be suspended entirely and should Europe fail to find viable alternatives. The forecast also rested on the assumption that uncertainty and commodity prices will remain high, trade will decline, and financing conditions will erode.

“The biggest problem currently is too-high inflation. We have both a driver and anchor for inflation: energy is the key driver of inflation in the Eurozone, whereas moderate wage inflation functions as the anchor,” Rehn was quoted as saying.

Meanwhile, inflation in the Eurozone soared to 10% in September, the highest rate on record since 1991. Central banks across Europe have attempted to rein in inflation by tightening their monetary policy and raising interest rates. This move, however, slows economic growth because the rising cost of borrowing spurs companies to reduce investments and households to limit spending.
The ECB itself raised its reference interest rate by 0.5 percentage points in July and another 0.75% in September. Its governing body hinted that the rates should be raised even higher, making analysts envisage another 0.75% hike in months to come.
Meanwhile, Nordea chief analyst Jan von Gerich estimated that the risk of stagflation has clearly increased across the Eurozone, partly because of the actions taken by the ECB.
“Together with the energy crisis, the tightening of monetary policy is one reason for the slowing economic growth. But on the other hand it’s necessary to bring inflation under control. It remains to be seen to what extent unemployment, which is part of stagflation’s definition, will rise in the eurozone,” he said.
The term stagflation, a portmanteau of stagnation and inflation, refers to the condition of slow economic growth and high unemployment accompanied by persistently rising consumer prices.
Energy Crisis in Europe
Inflation Keeps Rising Across Eurozone & UK as Brussels Mulls New Sanctions on Russia
The fierce cost-of-living crisis across the Eurozone has been exacerbated by its own sanctions against Russian energy, including gas, oil and coal. The biggest price rises were predictably for energy, at over 40 percent, followed by food at nearly 12 percent, as sanctions against Russia have disrupted exports of grain crops, oil seed, and fertilizers from the major producing regions.
Across the bloc, the worst-hit countries were the Baltic states of Estonia, Lithuania, and Latvia, where inflation was galloping at 24.1 percent, 22.5 percent, and 22 percent respectively. However, even deep-pocketed Nordic nations with more stable economies have seen inflation break records unseen for generations, with governments struggling to adopt relief packages and ease the pressure on their populations.
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