Romain Fornell’s four restaurants have not had a table for two months. The hustle and bustle has returned to Barcelona. After two years of inertia, cruise ships, big concerts and festivals have finally returned to the city. And the tourists. Hotels put up the full sign again and restaurants refill the box. It is the start of a promising summer. “The figures are already higher than 2019 and the forecasts for the coming months are very good,” says Fornell happily. It weathered the pandemic crisis and claims to have managed to adjust to inflation. But he does not want to foresee what could happen in the fall. “We learned to live from day to day,” he says. Until then, new clouds threaten to cloud the economic recovery, so that analysts are already seeing signs of a recession.
Formulating economic forecasts has become an impossible exercise. Even in the short term. The recovery that should have followed the pandemic crash is fading. A year ago, the major international organizations forecast very strong growth in the euro zone, even close to 4%. The European Central Bank (ECB) was the latest institution to cut it to 2.8%. In another era, any economist would think more than twice before saying the word “recession.” Not today. Headwinds are blowing into Europe from all latitudes, especially from Russia. The prolongation of the war in Ukraine and the passage of new rounds of sanctions could exacerbate price increases and further damage growth in the euro zone. If Moscow decides to turn off the gas supply, Europe could even face an icy winter.
Everything indicates that Europeans have already decided to take a summer break. In Spain, the high savings cushion they still have accumulated and the improving job market – with more permanent contracts – will allow hotels and restaurants to fill up. “We are seeing a willingness on the part of consumers to spend with savings available. And those expenses include leisure and tourism. Everything points to a good season,” says Ángel Talavera, an analyst at Oxford Economics. From the command centers of the EU, the summer in Spain, Italy or Greece is perceived as a balm to compensate for the setback that industry and construction in Germany could experience in this quarter.
But phrases like “black autumn” are beginning to spread among economists. “Let’s keep our fingers crossed,” says Fornell, the restaurateur from Barcelona. If nothing goes wrong, Europe – and Spain – must keep growing. The influential Ifo Institute in Germany expects the European locomotive to grow by 2.5% this year and 3.7% next year. Its head of analysis, Timo Wollmershäuer, explains that the war in Ukraine, the energy crisis and the lockdown in China have already resulted in forecasts for this year being lowered by 1.5 points compared to those at the end of 2021. This shock would have had the effect of hitting the German economy in normal times if we had slipped into a recession,” he regrets.
However, the forecasts of all organizations are full of asterisks and footnotes. The risks associated with the pandemic are fading, but new geopolitical threats are emerging. “In Europe, the story could be even darker than in the United States because of the prospect of a Russian energy boycott,” warns Adam Tooze, a historian and professor at Columbia University.
He knows all sides of the coin in detail.
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The ECB has outlined an alternative scenario to its key forecasts, in which it considers a full faucet closure by Vladimir Putin. The Kremlin has already blocked deliveries to several EU partners such as the Netherlands and Finland and has even partially reduced deliveries to Germany, France and Italy. But Europe fears Moscow will go further with cuts that will imply rationing and drive up prices further.
According to the ECB, this hypothesis already assumes significantly weaker growth for 2022 of 1.3% and even a decline of 1.7% in 2023. Inflation would also become more stubborn, averaging 8% this year and 6.4% next year. High prices would reduce household income and dampen consumption. In silver: the dreaded stagflation. Despite their limited involvement in Russia, it would be strange if Spain weren’t caught up in this dynamic.
The pandemic has shown how quickly any crisis, whether health or economic, spreads across the planet. And Europe’s most important trading partners are gradually showing signs of exhaustion. In the United States, an overheated economy, there have already been two phenomena this week that have not gone unnoticed by economists. First, Wall Street has embarked on an unmistakably bearish path, having racked up losses of more than 20% since its all-time high on Jan. 4. And second, the yield curve was inverted; That is, the 2-year bonds were yielding more than the 10-year bonds, indicating near-term pessimism. Either way, analysts are seeing warnings of an imminent recession.
Almost more valuable than these two signs is the consensus of economists and businessmen. And they are already openly talking about a recession in 2023. Soft and short, of course. 70% of economists polled by the Financial Times believe so. “Inflation is above target and the Federal Reserve needs to reduce it by raising interest rates and slowing demand and the economy,” said Jonathan Wright, an economics professor at Johns Hopkins University who coordinated the survey.
With its aggressive interest rate policy, the central bank headed by Jerome Powell wants at best to bring about a soft landing for an economy that has quickly recovered from the pandemic and has a very strong labor market. However, Wright thinks this is unlikely. “Given the inflation situation, it is clear that the Fed [nombre informal de la Reserva Federal estadounidense] it needs to tighten financial conditions quickly – and it will – even if the costs cause a recession,” he argues.
Adam Tooze, who highlights this “dramatic change” in expectations, says he is primarily concerned about the US housing market. “Mortgage rates have gone from 3% to 6% in six months. Prices are forecast to fall by 2023. The US real estate sector is the most important asset class in the global economy,” he adds. Added to this is the collapse of the cryptocurrency market, which had already become popular as an investment.
ECB earrings
There is also no good news from China, the EU’s other major trading partner and itself a “systemic rival”, as it is called in Brussels. Beijing’s Covid-zero policy, based on restrictions in the face of new outbreaks, continues to prevent the tightening and major global congestion, which is also responsible for the inflation gallop, from ending. Investment bank Nomura expects the Asian giant to grow 3.3%, modest compared to China’s rapid pace of expansion in recent years. And that data could narrow if the brick bubble loomed with Evergrande’s real estate crisis eventually bursts, the company says.
But not all dangers are outside. The world is also waiting for the solution that the ECB gives to the dilemma between growth and inflation. Southern countries accept that interest rates should be raised, but with great caution lest the recovery derail. Those in the north think that Frankfurt is late. “The ECB has yet to admit that it will have to hike interest rates well into positive territory, above 3% and possibly much higher. That will slow down the economy. The war in Ukraine increases the likelihood of a recession. It is frustrating to see that the ECB is still hesitating,” says Charles Wyplosz, professor at the Graduate Institute in Geneva.
However, the south of the euro zone, led by Italy, held its breath after the increase in risk premiums and only announced the first rate hike. The fear of the big cloud: The debt crisis of 2010, which was also the euro. Athanasios Orphanides, now a professor at the Massachusetts Institute of Technology Business School, was then Governor of the Central Bank of Cyprus and a member of the Governing Council. He believes that the problems that hit the eurozone at the time have not yet been resolved. “If the ECB tightens monetary policy, we could see a more significant tightening of monetary conditions in Italy and Spain, for example. This can lead to disastrous results in these member states, but the whole euro area will suffer,” he says.
If all of these risks materialize, the big question is how strong that pullback will be. Lorenzo Codogno, a former Italian finance minister and professor at the London School of Economics, believes that if the recession does hit, it should be localized to a few countries and short-lived. And this time Europe has an instrument that has only just begun to be used to support investment: a recovery fund of up to 800 billion.
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