Euro-area recession risk now at record high as energy shortages grow

Euro-area recession risk now at record high as energy shortages grow

The risk of a euro-area recession has reached the highest level since November 2020, as energy shortages threaten to drive already record inflation higher, according to economists polled by Bloomberg.

The probability of output shrinking for two straight quarters has gone up to 60% from 45% in a previous survey, and up from 20% before Russia invaded Ukraine. Germany, the bloc's largest economy and one of the most exposed to cutbacks in Russian natural gas supplies, is likely to stagnate from as early as this quarter.

The rise in the cost of living is hurting euro-area companies and households, with Russia s energy threats exacerbating the problem going into the final months of 2022. Supply bottlenecks have been worsened by severe droughts, which have resulted in falling water levels across Europe s rivers this summer.

Inflation is now expected to average nearly 8% in 2022 - about four times the European Central Bank's goal in 2022 and 4% next year. Respondents still see it slowing to 2% in 2024, but they still see it slowing to the 2% target in 2024.

Economists think that the ECB will raise interest rates by a half-point in September -- as it did in its initial move in July. It would bring the deposit rate to 1% by the end of the year, with a quarter-point hike expected in March.

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