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The ride could be shallow or steep, but either way, the European Union and Britain could begin to slide into recession.
The British economy shrank by 0.2 percent in July, August and September compared with the previous three months, the Office for National Statistics reported on Friday. It was a decline that is expected to continue and spread across the continent by the end of the year.
Many countries are likely to enter recession in the last three months of 2022, Paolo Gentiloni, dt.E Commissioner for the Economy of the European Union, said on Friday. “The EU economy is at a turning point,” he said. “Recent survey data points to contraction for winter.”
But while central bankers in Britain have warned of a “prolonged” recession lasting up to two years, the European Union has predicted the 27-member bloc will face a “short-term and not too deep” one.
Indeed, Mr. Gentiloni said he expected the union to end 2022 with a better-than-expected 3.3 percent growth, although that total is likely to weaken significantly next year to just 0.3 percent.
Different views show how the pandemic and the Russian invasion of Ukraine are having an economic collapse and a disproportionate impact on the region’s smorgasbord of countries.
Britain and the European Union are suffering from the twin woes of rising inflation and slow or declining growth. The war and retaliatory sanctions against Russia, one of the world’s largest energy and grain producers, have driven up global fuel, food and fertilizer prices. Supply chain disruptions rooted in the pandemic and ongoing Covid-19 lockdowns in China — most recently in the manufacturing hub of Guangzhou — add to the pile of economic woes, as do climate-related disasters.
In Germany, Europe’s largest economy, the annual inflation rate, a benchmark, reached 10.4 percent in October. In Britain, inflation hit 10.1 percent in September, the highest level in 40 years, and is expected to rise further before peaking. Call-in radio talk shows on the BBC are dominated by people worried about being able to heat and light their homes.
“There is a tough road ahead,” Jeremy Hunt, Chancellor of the Exchequer, said. declared Friday, “which will require extremely difficult decisions to restore confidence and economic stability.”
Preliminary estimates from the Office for National Statistics show that the recession in Britain was widespread – including in the manufacturing and service sectors – and meant that the country’s gross domestic product, or gross output, remained below its pre-pandemic level. The drop-off was particularly sharp in September, down 0.6 percent from the previous month, although that number was affected by the death of Queen Elizabeth II, which caused widespread, unplanned business closures.
The quarterly contraction was smaller than expected – economists surveyed by Bloomberg had expected a 0.5 percent drop – and after the announcement, the yield on 10-year British government bonds fell briefly before rising slightly to 3.33 percent.
A recession is traditionally defined as several months of significant decline in economic activity.
The Bank of England has stressed its determination to stem the upward march of inflation by raising interest rates even at the risk of pushing the economy into recession, although it has signaled that a rate hike is unlikely as traders had expected. Last week, the Bank raised its key rate again, and predicted that the British economy would contract in the second half of this year and continue to contract until mid-2024.
Higher interest rates, which make it more expensive to borrow money for mortgages and investments, curb spending by both businesses and consumers and can increase unemployment.
Yet Britain’s economy is also suffering from a series of self-inflicted wounds by the ruling Conservative Party. The widely criticized economic plan proposed in September by then-prime minister Liz Truss, which included steep, unfunded tax cuts and big spending increases to help households afford rising energy bills, sent financial markets into turmoil.
Political and economic instability resulted in a stunning policy reversal and the resignation of Mrs Truss. Rishi Sunak, the new prime minister, and Mr Hunt are due to announce their economic game plan next week, and it is expected to include tax increases, spending cuts and debt reduction.
The package will “strengthen Britain’s dire economic outlook,” Pantheon Macroeconomics predicts.
There is also widespread agreement among economists and analysts that Britain’s decision to leave the European Union in 2016 was a major and long-lasting blow to its economy.
Fewer EU countries are expected to enter negative growth next year, but the outlook for Germany, which has been hit hard by Russian pipeline gas losses, remains grim. The European Union estimates that its economy will shrink by 0.6 percent in 2023.
Across Europe, inflation is expected to continue at higher levels than previously forecast. A strong labor market remains what Mr. Gentiloni called “a bright spot.”
The picture is bleaker in Britain, where long-term illnesses keep around 2.5 million people out of the workforce, leaving employment below what it was before the pandemic.
Across London, Christmas lights are up, but across the country fewer shoppers visited shopping centers and high streets than last week, the statistics office reported. Consumer confidence is nearing record lows, while businesses are reporting a drop in orders. The number of people looking to buy a home has dropped after last month’s rise in mortgage rates.
“The UK economy has again slipped behind the G7 pack,” Pantheon wrote in its daily newsletter, referring to the grouping of some of the world’s largest advanced economies.
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