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Eurozone growth slows down hit by impact of Ukraine war and pandemic

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By Euronews  with AFP, AP, Reuters
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 a customer pushing a shopping cart past the shelves during purchases at a supermarket in Duesseldorf, western Germany, on April 29, 2020.
a customer pushing a shopping cart past the shelves during purchases at a supermarket in Duesseldorf, western Germany, on April 29, 2020.   -   Copyright  INA FASSBENDER / AFP

The eurozone's economic growth slowed to 0.2% in the first quarter from the previous quarter, while inflation remained at a record high in April, Eurostat said on Friday, against the backdrop of the pandemic and the war in Ukraine.

From October to December, gross domestic product (GDP) growth had reached 0.3% for the 19 countries sharing the single currency.

For the European Union as a whole, GDP grew by 0.4% in the first quarter, after 0.5% in the last three months of 2021, according to preliminary estimates from the European statistics office.

After three quarters in positive territory, the growth rate has nevertheless remained on a strong upward trend over the year: +5% for the eurozone, +5.2% for the EU, compared to the first quarter of 2021.

Among the large countries, Spain and Germany saw their economies grow by 0.3% and 0.2% respectively in the first three months of the year, quarter-on-quarter -- a number far smaller than previously projected. France stagnated (0%) and Italy fell (-0.2%).

Rise in prices causes instability

The economy is notably handicapped by the rise in consumer prices, particularly in the energy sector, aligned with the war in Ukraine. The inflation rate in the eurozone remained at a record level in April, at 7.5% over one year, according to Eurostat.

These figures are the highest recorded by the European statistics office since the indicator was first published in January 1997. Inflation has broken a new record each month since November.

In April, as in previous months, the highest rate of increase was recorded for energy prices (+38%). However, this increase has slowed down slightly compared to March when it reached 44%.

However, price increases are accelerating in other sectors. In food (including alcohol and tobacco), it reached 6.4%, after 5% in March. In industry, it rose to 3.8% (+0.4 points compared to March). The same trend was observed in services: +3.3% (+0.6 points).

High inflation is reverberating through politics and the economy of member states, as governments enact cash support for hard-hit households. 

Germany is dropping a charge for supporting renewable energy on electric bills, saving a family of four around €300 a year. The country's IG Metall industrial union is proposing an 8.2% annual increase for the country’s steelworkers going into wage talks.

Contraction 'could not be ruled out'

In Spain, the country's central bank stated in early April that the economy has still not recovered to pre-pandemic levels, while the war in Ukraine only made matters worse. 

Although a minor growth could be expected, analysts said, a contraction cannot be ruled out, while Spain might have to wait until 2024 to feel the first major signs of recovery.

"The impact of the conflict will be concentrated in the second quarter under our central scenario which does not encompass an escalation," said Bank of Spain Chief Economist Angel Gavilan.

Gavilan saw inflation, which hit 9.8% in March year-on-year, hovering around 10% until the summer, when it should start abating. 

For all of 2022, Gavilan said, inflation should reach 7.5% -- double the bank's previous forecast of 3.7% -- before gradually dropping to 1.6% by 2024.

Meanwhile, fears of even higher heating, electricity and vehicle fuel prices are one factor holding back European governments from deciding to halt energy imports from Russia as part of the sanctions over the Kremlin’s invasion of Ukraine.

Inflation is also putting uncomfortable pressure on the European Central Bank to look at raising interest rates from record lows in the coming months. 

Higher rates to quell inflation could also weigh on a recovery that has been shaken by the energy crunch, the war, and the latest outbreaks of COVID-19.

However, ECB President Christine Lagarde said earlier in April that the bank will raise interest rates“some time after” ending its pandemic stimulus efforts later this year. 

The bank is sticking to a gradual path, Lagarde stated, adding that the experience with stimulus purchases showed “flexibility served us well”.