Investing.com — Suddenly things have turned around in Europe. Well, relatively speaking, at least.
First, good news. The energy-driven disaster that threatened to hit Europe 11 months ago when Russia invaded Ukraine was prevented by a combination of political resolve, economic necessity and sheer luck. .
The Brussels-based think tank Bruegel estimates that soaring prices and collapsing confidence have caused industry in the eurozone and the UK to drop factory demand by 25% in Italy and 32% in Germany in December, reducing their use. has been significantly reduced. A prolonged period of warmer-than-usual weather has dampened household demand across the continent, but has also ruined the ski season.
Europe is now past the midpoint of what the gas industry considers to be the heating season, and its storage facilities are still – surprisingly – 74.8% full, above the high end of the range seen in recent years. Northwest European natural gas benchmark futures fell to their lowest level since September 2021 this week as traders and regulators erased the risk of a gas crisis.
All reflected in the (admittedly not perfect) S&P Global (NYSE:) Purchasing Managers Index, which this week topped the 50 line, which indicates normal growth, for the first time since July.
Indeed, the European Central Bank had already predicted most of this in December when it raised its growth forecast for this year to a (still poor) 0.5%. Analysts at JP Morgan (NYSE:) are now estimating that could be around 1.0%, not far below what analysts believe is a medium-term possibility.
The economy is getting tailwinds from important sources. According to ECB estimates, the eurozone government has implemented support measures worth his 1.6% of eurozone GDP in next year’s budget, mainly in the form of energy subsidies. In addition, the reopening of China’s economy will revive demand for eurozone exports, removing the remaining supply chain bottlenecks that have plagued European industry over the past three years, barring a disaster.
But if it all sounds too good to be true, it probably is.
For example, consider these gas prices. At €55 per MWh, more than three times the average of the years before the current crisis, if sustained, it threatens to turn Europe’s remaining energy-intensive industries into wastelands. That price equates to over $17.50 per million Btu. That’s more than six times what the US industry is paying at Henry Hub.
The ability of European industry to remain competitive at these levels must be seriously questioned. Germany’s sector output fell 12.9% year-on-year in November, prompting BASF, the largest chemical company and embodying Germany’s dependence on cheap Russian gas, to slash operations in its home country. I have already warned you that you should.
Then there is the nature of its financial support. Faced with last year’s emergency, eurozone governments borrowed from the future to cushion the expected drop in output from the war. While this is a perfectly legitimate objective, it does mean that in the Eurozone fiscal policy can be expected to weigh on his output in 2024 and beyond.
Then there’s the slowdown in the US and UK, where Eurozone exports were nearly triple China’s last year before the pandemic. The UK economy, suffering from post-Brexit turmoil, will not be able to absorb the same level of eurozone commodities as before.
Nor is Europe cut off from cheap Russian energy. It has cut coal and natural gas imports to near zero, but must take the final step of banning imports of Russian refined products, especially diesel. Some analysts believe oil markets will be able to contain the price shock from that move, which takes effect next week, but no one expects fuel, which is vital to much of heavy industry and transportation, to be cheaper in Europe. not.
Back to the war in Ukraine. The fact remains that the conflict has forced Europe to build higher costs of all kinds into its economy. Agreeing to a major shift in policy has arguably increased the chances of that war and the economic turmoil that comes with it lasting longer. – Risk of premature demise from a Russian nuclear attack).
All this means that the European Central Bank must respond to the threat of continued tightening of monetary policy, lest the inflation genie escape. December ECB meeting notable for a clear shift in bank rhetoric on pipeline inflationary pressures and the risk of a ‘second round effect’ as consumers try to make up for lost purchasing power with higher wage increases Even the ECB’s chief economist, Philip Lane, has since said that the ECB needs to pay attention to the effects of last year’s inflation surge over years, not months. I warn you.
Therefore, two cheers for the Eurozone. The worst scenario has probably been avoided, but the most likely scenario is still far from exciting.