Explained: Why Europe is likely to escape recession but the UK is in trouble

After much doom and gloom over the Russia-Ukraine war, some have begun to think that Europe will escape the recession this year.

The brighter prediction comes as a survey showed Europe’s economy growing for the first time since June and in the backdrop of lower inflation, improved supply chains, and the recent reopening of China’s COVID-scarred economy.

The news comes a week after data showed Europe may avoid a recession that had been predicted several months ago.

However, the United Kingdom might not be so lucky.

Let’s take a closer look:

Indicators brighten for Europe

In January, the S&P Global Flash Eurozone purchasing managers’ index (PMI) rose to 50.2 from 49.3 in December.

A figure higher than 50 denotes growth.

“This was the third successive increase and, as such, provides more evidence that the region has so far avoided the sharp downturn that we and many others had predicted,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a note.

Factors such as falling gas prices, warmer than expected weather at the start of the year, greater than expected reserves, and a steady supply of liquefied natural gas (LNG) to Europe seems to have calmed the nerves, as per Yahoo! News.

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The website reported that the Transfer Title Facility (TTF), Europe’s leading gas trade hub, is charging prices at levels witnessed prior to the Ukraine war.

Euronews quoted Maria Demertzis, a senior fellow at a Brussels-based think-tank as saying that customers and producers alike had made great efforts to deal with consumption.

“A very interesting observation is that industries managed to reduce their gas consumption without a corresponding reduction in production as they have been very inventive in the process. This is great news for the resilience and adaptability of our industry.”

“I would actually be optimistic about the prospects," Demertzis added.

Peter Vanden Houte, ING’s chief economist for the eurozone, told the website state exchequers were strained by subsidies but that the move appears to have borne fruit.

“We have seen confidence increasing somewhat over the last two months, which means that consumption is likely to remain a bit more resilient. That said, it is not all rosy either,” Vanden Houte told Euronews.

EU economic commissioner Paolo Gentiloni was quoted as saying by Reuters earlier in January that although the bloc’s economic situation “is still uncertain … we had some encouraging news.”

“We managed to reduce our energy dependence, energy prices went down significantly and inflation peaked last year in Europe,” Gentiloni said ahead of monthly talks with eurozone finance ministers in Brussels.

“So, there is a chance to avoid a deep recession and maybe to enter a more limited, shallow contraction,” he added.

EU trade commissioner Valdis Dombrovskis echoed Gentiloni’s assessment, but added that the bloc should still “remain vigilant.”

What about the UK?

The same PMI survey showed the UK’s index falling from 49 in December to 47.8 in January, as per CNN.

That’s the sixth straight month of contraction.

“Weaker-than-expected PMI numbers in January underscore the risk of the UK slipping into recession,” Chris Williamson, chief business economist at S&P Global Market Intelligence said.

“Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year,” he added.

CNN quoted Williamson as blaming not just short-term factors for the damage but also “ongoing damage to the economy from longer-term structural issues such as labour shortages and trade woes linked to Brexit.”

Meanwhile, economists have warned that the UK economy is in for a rough time.

CNBC quoted experts as warning that UK’s economy in 2023 will shrink almost as much as Russia.

Goldman Sachs predicted a 1.2 per cent reduction in the UK’s real GDP – far below the other G10 nations.

The UK is only slightly ahead of Russia, which is projected to record a 1.3 per cent contraction in 2023.

Meanwhile, the Organization for Economic Cooperation and Development has also predicted that the UK will ‘lag significantly’ in the years to come behind other developed nations, as per CNBC.

Consultancy firm KPMG put the UK’s contraction in terms of real GDP at 1.3% in 2023 and said it would be a “relatively shallow but protracted recession.”

Challenges remain

Almost all experts warned last year that the eurozone would enter a recession – two consecutive quarters in which the economy shrinks – in the final three months of 2022 and the first quarter of 2023.

Those fears are receding, but Europe still faces challenges ahead.

Demand for goods and services continued to weaken, industrial orders fell in January – although less sharply than in December – and the impact of more interest rates hikes could still be felt.

European Central Bank chief Christine Lagarde on Monday showed no signs of moving away from more rate hikes, insisting they must continue rising at a “steady pace” in order to avoid inflation becoming entrenched.

Inflation in the single currency area remains high at 9.2 per cent, but has fallen for two months in a row, boosted by the slowdown in the rate of energy price rises.

‘Welcome news’

Last week Lagarde said she expected the eurozone economy to fare “a lot better” than initially feared, with expectations of “a small contraction” instead of a recession.

“The survey undoubtedly brings welcome good news to suggest that any downturn is likely to be far less severe than previously feared and that a recession may well be avoided altogether,” said Chris Williamson, S&P’s chief business economist.

The economy has been helped by concerns easing over the impact of soaring energy bills, thanks to mild winter weather and generous government support on the continent.

But Williamson warned that the region was “by no means out of the woods yet”.

The EU’s economy commissioner Paolo Gentiloni last week said there was an expectation of “subdued growth” for the rest of 2023.

“The war in Ukraine of course continues to cloud the outlook. And while high storage levels and lower demand have helped to bring energy prices down, the crisis is certainly not over,” Gentiloni added.

The European Union’s statistics agency will publish growth data for 2022’s fourth quarter next Tuesday.

The single currency area’s largest economy, Germany, benefited from the easing of supply chain pressure which helped manufacturing, S&P said, and reported improvement with the composite PMI rising from 49.0 in December to 49.7 in January.

But output in France, where activity is driven by domestic consumers and services, fell for a third consecutive month after a sharper drop in services activity.

S&P said output for the rest of the eurozone, which comprises 20 countries after Croatia joined in January, also returned to growth.

With inputs from agencies

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