Where does Europe’s economy stand, and where is it headed?
In this episode of Real Economy, we travel to the Brussels Economic Forum to ask high-level decision-makers how the EU can shape its digital, green and economic policies while ensuring the protection of its workers, industries, and consumers.
With war raging in Ukraine, the effects of climate change tightening their grip, a scarcity of resources, and global competition to acquire them, Europe is facing a multitude of challenges.
But in its latest economic forecast, the European Commission predicts a continuous slowdown of the EU’s inflation rate, from 9.2% in 2022 to 6.4% this year and 2.8% next year.
And, after falling from 3.5% in 2022 to 0.8% this year, GDP growth in the EU should pick up steam again and reach 1.6% in 2024.
Speaking to Euronews at the Brussels Economic Forum (BEF), the European Commission’s flagship annual economic event, the EU’s Commissioner for the Economy told Euronews that these figures generate a sense of cautious optimism.
[The situation is] better than expected,” Paolo Gentiloni told Euronews. “If we look back to a few months ago, we were estimating a much worse situation [where] we had some concerns on energy supply, even thinking [about] possible blackouts. And a lot of concern [about] the possibility of a recession, and bankruptcies.”
The BEF coincided with the European Central Bank’s decision to raise again its key interest rates, in a bid to curb inflation. Commissioner Gentiloni said he was not worried about the potential impact on growth.
However, another recent development could be a matter of concern for jobs in the EU and even trigger new legislation: Artificial intelligence.
“We need a set of rules. And we European Union, we are [the] master of rules. So I’m quite confident that we will have good rules also on artificial intelligence,” Gentiloni added.
Europe’s green and digital transition
Digitalisation, along with the dire consequences of the climate crisis are two of the main drivers pushing Europe’s economic transition. For Member states, this means greater investments in education and training.
“This is probably one of the key challenges we have going forward: how to ensure that we are leading these transitions, the twin digital and green transformation, that we are leading them from a technological point of view,” explained Nadia Calviño, Spain’s Minister for the Economy and Digital Transformation.
“And those sectors that are proving to be the most dynamic in job creation are linked to new technologies, information technologies, science, research, health…And this shows that the structural transformation is underway of the Spanish economy.”
“And we are investing around €4 billion of NextGenerationEU funds to underpin a very ambitious digital skills programme to ensure that our schools, our universities, but also the elderly, have access to those skills which are going to be essential,” Calviño added.
Addressing Europe’s social inequalities: Taxation and public spending
Despite an unemployment rate of only 6% in the European Union, one-fifth of the EU population is still at risk of poverty or social exclusion.
The cost-of-living crisis and rising inequalities are fueling social unrest and distrust in politics.
Gabriel Zucman, a Professor of Economics at the University of California, Berkeley, told Euronews that Europe needs to rethink its public revenue sources and start taxing the rich.
“Almost all social groups in the EU, and within each Member state, they pay a lot in taxes. Because we have a social model that relies on significant levels of taxation. That’s true for almost all social groups with one big exception, which is the truly wealthy,” he explained.
“There is a need for government revenues today in the context of high public debts, rising interest rates. We should start by collecting revenues from the groups of the population that pay significantly less taxes than the rest of us. And that means today, in 2023, it means the very wealthy.”
This is a call shared by the European trade unions, which argue that new public revenue sources are one way to increase social justice. Another way is through public spending.
“The rules need to change,” said Liina Carr, the Confederal Secretary at the European Trade Union Confederation. “We think that keeping that rigid 3% deficit level is actually not conducive in any way for public spending and investments because it is still limiting what the governments can do.”
“There has been also a debate that maybe some investments should be excluded from the debt and deficit rules like investment in greening, in digitalisation, investment in health, investment in education. The kind of investments that really prop up the economy and make sure that economies remain strong,” she added.
This debate has gained momentum in the EU, especially after the American Inflation Reduction Act of 2022.
With a massive allocation of $369 billion (€334 billion) towards promoting clean technology in the US, there is anxiety in Europe about being sidelined in the green transition.
But according to Siemens AG Chairman, Jim Hagemann Snabe, America’s Inflation Reduction Act could be an opportunity for Europe’s industrial ambitions.
“The Inflation Reduction Act for me is a catalyst for sustainable solutions. And so in that sense, it’s good. Europe was first with this idea with the Green Deal, and now they are stepping up,” he explained.
“I think the world is at an inflection point where we kind of have the technologies, we know how to rebuild energy systems to be renewable, how to reinvent transportation systems, how to make buildings carbon neutral.”
“And this is a catalyst for companies to invest more, invest faster and create the scale we need so that we can create and deliver a more sustainable future.”
The global race for resources
However, Europe’s green and digital transition hinges on critical raw materials, like lithium, cobalt and rare earth elements, of which the EU produces very little. China, on the other hand, accounts for 86% of the rare earth supply.
At a time of soaring geopolitical tensions, this reality is shaping Europe’s trade relations, according to the European Commission’s Vice-President, Valdis Dombrovskis.
“That’s why we put forward the raw materials strategy in the EU to boost domestic production and also have external supplies,” Dombrovskis revealed.
“So the aim for 2030 is to get 10% of extraction and mining domestically within the EU. It means 90% still would need to come (from) outside the EU.”
“And that’s why those partnerships with other countries will be very important. We do it through raw materials chapters in our trade deals. We are developing bilateral raw materials partnerships with different countries.”
The invasion of Ukraine by Russia is a stark reminder of the importance of reducing dependency on energy supplies.
Yet, as the climate crisis intensifies, aligning this objective with the sustainable management of scarce resources will remain a major challenge in the years to come.
Are we in a recession right now? What economists have to say – USA TODAY
Over the past year, economists have proclaimed that the U.S. is headed toward recession so relentlessly, you might think we’re already knee-deep in a slump.
But the economy has been remarkably resilient and, though wobbly at times, has repeatedly defied forecasts of a downturn. Economists, in turn, have continued to push out their estimates of when a recession will begin.
Yet forecasters still say there’s a 61% chance of a mild slide this year, according to those surveyed by Wolters Kluwer Blue Chip Economic Indicators.
All this begs the question: Are we in a recession now?
What happens in a recession?
Many Americans are familiar with the informal definition of a recession: Two straight quarters of declining gross domestic product, which is the value of all goods and services produced in the U.S.
But the real litmus test is more subtle. A recession is “a significant decline in economic activity that is spread across the economy that lasts more than a few months,” according to the National Bureau of Economic Research. NBER looks at a variety of indicators, particularly employment, consumer spending, retail sales and industrial production. The non-profit group often announces when a recession has begun and ended months after those milestones have occurred.
GDP fell each of the first two quarters of 2022 but much of the drop was traced to changes in trade and business inventories – two categories that don’t reflect the economy’s underlying health.
Why do economists expect recession?
Over the past 14 months, the Federal Reserve has raised interest rates at the fastest pace in 40 years to bring down inflation. Typically, when the Fed hikes rates so aggressively, borrowing to buy a home, build a factory and make other purchases becomes much more expensive. Economic activity declines, the stock market tumbles and a recession results.
Was there already a recession?
No. During the pandemic, households amassed about $2.5 trillion in excess savings from hunkering down at home and trillions of dollars in federal stimulus checks aimed at keeping workers afloat through layoffs and business closures.
As a result, Americans have a big cushion of savings to help them weather high inflation and interest rates. They’ve whittled down much of those excess reserves but about $1.5 trillion still remains, according to Moody’s Analytics.
Consumers also still have lots of pent-up demand to travel, go to ballgames and dine out now that the health crisis has receded. So while consumption has flagged, rising just 1% annualized at the end of last year, it bounced back and grew 3.8% in the first quarter.
Also, both households and businesses have historically low debt levels, Moody’s says, and so they’re not burdened by high monthly debt service payments.
Back in a bull market: As stocks pass a key milestone, here’s what you should know
Are we in a recession right now?
The vast majority of top economists say no. Housing has been in the doldrums, with home prices starting to decline, because of high mortgage rates. And manufacturing activity has contracted for seven straight months, also in part because of high rates that have dampened business capital spending.
But consumer spending, which makes up about 70% of GDP, has been surprisingly healthy, jumping 0.5% in April after adjusting for inflation.
As a result, the most critical economic indicator- employment – has stayed strong, with the public and private sector adding an average of 283,000 jobs a month from March through May. Also, longstanding labor shortages have led many businesses to hold onto workers instead of laying them off despite faltering sales.
All told the economy has lost some steam but it’s not shrinking. GDP grew at a 1.3% annual rate in the first quarter. And it’s projected to grow 1% in the current quarter, according to S&P Global Market Intelligence.
Will there be a recession in 2023?
Most economists still expect a recession in the second half of the year. They say the Fed’s high interest rates eventually will be felt more profoundly by consumers and businesses. At the same time, banks are pulling back lending because of deposit runs that led to the collapse of several regional banks early this year.
Perhaps the most reliable indicator of a coming recession is an inverted yield curve. Normally, interest rates are higher for longer-term bonds than shorter-term ones because investors need to be rewarded for risking their money for a longer period.
But the yield on the 2-year Treasury bond has been well above the 10-year Treasury for months. That’s been a consistent signal of recession because investors move money into safer longer-term assets – pushing their prices up and their yields down – when the economic outlook grows dimmer.
US and Allies Condemn Economic Coercion With Attention on China
(Bloomberg) — The US and five major allies condemned economic coercion and non-market policies regarding trade and investment in a joint declaration that didn’t cite China by name but clearly had Beijing in mind.
The six countries expressed concern about practices that they say “undermine the functioning of and confidence in the rules-based multilateral trading system.”
The message from the US, Australia, Canada, Japan, New Zealand and the UK carries no economic consequences and mirrors one released by Group of Seven nations after a meeting of leaders last month.
A US Trade Representative official, speaking to reporters on condition of anonymity before the statement’s release, said China has been the biggest perpetrator of the behavior condemned in the declaration.
The official mentioned China’s decision to cut off trade with Lithuania in 2021 after that Baltic nation allowed Taiwan to establish a diplomatic office there as an example of the kind of economic coercion that the declaration singles out.
Read More: G-7 Eyes China With New Joint Effort Against Economic Coercion
In response to a reporter’s question, the official rejected any comparison to the US, which has become one of the most prolific purveyors of measures that could be seen as economic coercion, chiefly through financial sanctions and limits on technology exports to countries including China.
US sanctions occurred in accordance with US laws and procedures, and in light of relevant rules and norms, the official said. The declaration makes explicit that it didn’t apply to actions that have “a legitimate public policy objective.”
“These legitimate public policy measures include: health and safety regulations, environmental regulations, trade remedies, national security measures and sanctions, and measures to protect the integrity and stability of financial systems and financial institutions from abuse,” according to the declaration.
Euro zone economy slips into technical recession after German revision
The euro zone economy was in technical recession in the first three months of 2023, data from European statistics agency Eurostat showed on Thursday, after downward revisions of growth in both the first quarter and the final quarter of 2022.
Euro zone gross domestic product (GDP) fell by 0.1 per cent in the first quarter compared with the fourth of 2022 and was 1.0 per cent up from a year earlier, Eurostat said in a statement.
That compared with flash estimates of growth of 0.1 per cent and 1.3 per cent published on May 16. Economists polled by Reuters had forecast on average respectively zero and 1.2 per cent expansion.
The revision was principally due to a second estimate from Germany’s statistics office showing that the euro zone’s largest economy was in recession in early 2023.
The euro zone figure for the fourth quarter of 2022 was also cut to –0.1 per cent from a previous reading of zero. The revisions confirmed that the euro zone was also in a technical recession.
This had been expected towards the end of last year as the euro zone wrestled with high energy and food prices and rising interest rates designed to curb inflation, but initial estimates had suggested the region had avoided this.
Along with Germany, GDP also declined quarter-on-quarter in Greece, Ireland, Lithuania, Malta and the Netherlands.
Eurostat said that household spending stripped 0.1 percentage points, public expenditure 0.3 points and inventory changes 0.4 points from quarterly GDP. Gross fixed capital formation added 0.1 points and while net trade a further 0.7 points as imports declined.
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