Mortal Combat

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What’s going on?

Data out last week showed the eurozone economy barely grew last quarter. As for why, take your pick…

What does this mean?

Europe’s ongoing battle with inflation, war, and supply chain issues all conspired to drag down the region’s economy, which only grew 0.2% last quarter compared to the quarter before. All its major economies were impacted: Spain’s growth slowed considerably, France’s output didn’t grow at all, and Italy’s shrank. Germany didn’t exactly shoot the lights out either, with its economy growing just 0.2%. But it was the only one to actually beat expectations. Oh, and its uptick marked a rebound from the previous quarter’s 0.3% contraction, which means it narrowly avoided slipping into a recession. Phew.

Why should I care?

The bigger picture: Rock, meet hard place.

This data will no doubt make the European Central Bank (ECB) uncomfortable, especially combined with inflation that won’t stop rising: new data on Friday showed that consumer prices in the eurozone were 7.5% higher in April than a year ago – the second record-high in a row. And to think, the ECB’s aim for inflation is down at the 2% mark. That means the central bank will probably have no choice but to raise interest rates this year, even though it’s been adamant it wouldn’t do that. That creates a whole new problem, mind you: higher interest rates slow down consumer and business spending, which could hamstring growth even more.

Zooming in: Stop fighting it, ECB.

Europe’s record inflation was mostly driven by energy prices in the region, which were 38% higher in April than they were a year ago. And with Russia halting natural gas supplies to Poland and Bulgaria last week, gas prices have just risen another 20%. That’ll only push inflation higher, and could force a reluctant ECB to step in even sooner.

Originally Posted April 29, 2022 – Mortal Combat

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