KUWAIT: The eurozone economy felt the fallout from the Ukraine war as output slowed and inflation stayed at record levels, official data showed Friday, imperiling Europe's recovery from the pandemic. The EU statistics agency said growth in the 19 countries that use the euro crawled along at 0.2 percent between January and March, down from 0.3 percent in the final quarter of 2021. For the European Union as a whole, gross domestic product grew by 0.4 percent in the first quarter, after 0.5 percent in the last three months of 2021.

Among major economies, Spain and Germany saw growth of 0.3 percent and 0.2 percent respectively in the first three months of the year. France was flat and Italy down, minus 0.2 percent. The small increase in eurozone growth "means that the region will avoid a technical recession in the first half of the year at least," said Andrew Kenningham, Chief Europe Economist at Capital Economics. "But rising inflation and the fallout from the Ukraine war mean that GDP is likely to contract in the next quarter," he said.

Price shock

Compared to a year ago, the growth level in Europe still remains high, coming off the big crashes in GDP because of the coronavirus pandemic that put the global economy on its knees. This meant that the growth rate year-on-year was up a solid five percent for the eurozone, and 5.2 percent for the wider EU, compared to the first quarter of 2021. The big shock remains consumer prices, with the economy handicapped by the rise in consumer prices, especially in the energy sector because of the war in Ukraine.

Consumer prices in the eurozone soared by a record 7.5 percent in April, up from a revised 7.4 percent the month before, Eurostat said. These figures are the highest recorded by the European statistics office since the publication of this indicator began in January 1997. Inflation has broken a new record each month since November, though the leap in April was more moderate than previous months. In April, the highest rate of increase was recorded for energy prices, which was up by 38 percent. This increase was slightly slower compared to March when it reached 44 percent.

Rate hikes?

The European Central Bank believes that inflation will gradually diminish from the current eye-watering levels, but remain well higher than its target two percent for the rest of 2022 at least. The ECB has faced pressure to increase rates and rein back stimulus that critics say stokes inflation, but Christine Lagarde, the central bank's president, has said cutting off the taps abruptly would achieve little. "If I raise interest rates today, it is not going to bring the price of energy down," Lagarde told US network CBS this week.

But ING economist Bert Colijn said that Friday's continued growth figures, even if feeble, meant the ECB was "likely to act sooner rather than later" on rate hikes. "While the economy remains weak... don't expect the ECB to wait much longer," he said. Analysts agreed that given the unknowns on the war in Ukraine, the outlook for the European economy over the coming months remained highly uncertain.

French growth crashes

The French economy flatlined in the first quarter as households reduced their consumption due to rising inflation and the war in Ukraine, the national statistics agency said Friday. The zero-growth result was weaker than the INSEE agency's pre-war forecast of a 0.3 percent expansion, underlying the economic difficulties faced across Europe. The French annual inflation rate also accelerated to 4.8 percent in April, up from 4.5 percent the month before, INSEE said in a separate statement. "Gross domestic product is at a standstill ... it bears the mark of the two combined external shocks (COVID and the Omicron variant in January, then the war in Ukraine that strengthened inflation)," INSEE economist Julien Pouget wrote on Twitter.

The figure puts an end to France's strong economic rebound from the COVID-19 pandemic and poses a challenge to President Emmanuel Macron, who was re-elected last weekend. Economic growth had been clocked at 0.8 percent in the last quarter of 2021 and 3.0 percent in the third. European economies have been badly affected this year by supply problems linked first to the pandemic, then the war in Ukraine-as well as sanctions imposed on Russia following its February 24 invasion of its neighbor. Figures also released Friday showed that the eurozone's GDP growth slowed to 0.2 percent in the first quarter, with a Germany eking out a similar gain as it avoided a second consecutive quarterly contraction. - AFP