Wed, 26 Jan 2022

by Xinhua writer Huang Zemin

LONDON, Jan. 10 (Xinhua) -- Heading into the new year, European economies are in for a rough ride as they attempt to bounce back from the economic enormity of the coronavirus pandemic.

Pressure has loomed large and come from a combination of old and new problems: The COVID-19 pandemic remains a headwind, which has sent the markets to panic lows. As energy prices increased sharply and demand outpaced constrained supply in some sectors, record-breaking inflation has swept through Europe.

Even though some expect Europe's economy to grow faster than previously forecast but the road to recovery still remains unclear. SURGING INFLATION

With Europe's economic recovery underway, some believe the momentum would continue in 2022. In the euro area, output is expected by the European Central Bank (ECB) to exceed its pre-pandemic level in the first quarter this year. And some research institutes have anticipated similar growth for Britain.

President of the ECB Christine Lagarde told reporters in December 2021 that the ECB forecast annual real GDP growth at 4.2 percent in 2022 and 2.9 percent in 2023, revised down for 2022 and up for 2023 compared with September projections.

Inflation, among other major challenges, is set to add uncertainty to Europe's economic recovery.

"Inflation is on everybody's minds," said chief economist Laurence Boone at the Organisation for Economic Co-operation and Development in a December report. As in many parts of the world, surging prices have engulfed Europe, hitting customers across the region with soaring food and energy bills.

The price hike was thought to stay, at least for the several months ahead. Germany, Europe's largest economy, saw the biggest price increase for almost 30 years in December, beating forecasts. "Supply bottlenecks result in a shortage of supply, which causes consumer prices to rise," Thiess Petersen, senior adviser at the German Bertelsmann Foundation, told Xinhua via an email interview.

"I assume that this is only a temporary phenomenon," Petersen added. "As the supply bottlenecks ease in the course of 2022, inflationary pressure should ease, too." Nonetheless, the expert said an inflation rate of below 2 percent is not expected until 2023.

In Italy, economists have said the recovery could be muted in 2022 by rising prices, especially fuel prices. Poland has also reported a high inflation not seen over the past 20 years. Commentators expected inflation to further rise this year, and the Polish government has announced lowering value-added tax (VAT) on certain goods to protect consumers.

Britain's inflation soared to a 10-year high of 5.1 percent in November 2021, but many economists have expressed optimism. "April should mark the inflationary peak," said chief UK economist Andrew Goodwin at Oxford Economics in a December briefing, noting that the oil price is expected to fall back through 2022 and natural gas prices will fall back after the winter.

Echoing the upbeat views, analysts at Barclays Private Bank said in December: "Although we expect inflation to continue to overshoot central bank targets, we believe it will be less of a concern by the end of 2022." VIRUS CONTINUES TO BITE

Europe is scrambling to tackle yet another tough winter, as the highly contagious Omicron variant has driven a tsunami of COVID-19 cases. Countries in the region, nonetheless, seemed better positioned this time due to a higher rate of vaccination and the less severe diseases Omicron appears to produce than Delta.

"We are starting the year with a solid gain of 2.2 percent," French Economy and Finance Minister Bruno Le Maire has recently told radio RTL, though France is undergoing a violent fifth wave of the virus. "I am convinced of the return of strong, dynamic, rapid growth as soon as the Omicron wave will have passed."

Progress in vaccination sets up the expectations. "Many people have been vaccinated and booster campaigns have accelerated. Overall, society has become better at coping with the pandemic waves and resulting constraints," Lagarde said during the press conference. "This has lessened the pandemic impact on the economy."

On top of that, encouraging signs of the new variant's milder impact also mean lighter restrictions and a smaller economic impact than seen during the last winter wave, said Angel Talavera, head of Europe economics at Oxford Economics, in a January report.

Even so, economists have stayed alert to the economic havoc that waves of COVID-19 could wreak. "Voluntary social distancing, a decline in consumer confidence and disruption to labour markets owing to widespread isolation requirements will still cause activity to slow during the winter months," Talavera added.

Causing record-high cases, Omicron has triggered another round of travel restrictions in Europe and beyond. "Without an effective fight against the coronavirus pandemic on a global level, there will be no stable economic development -- neither in Germany nor in Europe and in the rest of the world," Petersen told Xinhua. BIG ECONOMIES FARE BADLY

Stepping into 2022, major European economies got entangled in problems that could go beyond their borders. If ill managed, the hot potatoes would deal a blow to regional growth, experts have warned.

Germany has been the most exposed to supply chain bottlenecks because of a larger industry and long supply chain, said economists at S&P Global Ratings in their Eurozone economic outlook for 2022.

"The lack of inputs and components from abroad means that many companies' orders cannot be processed," Petersen told Xinhua. "Supply bottlenecks result in a shortage of supply, which causes consumer prices to rise."

In Italy, soaring energy prices will hurt the country more than many others since it imports most of its energy, Alessandro Polli, an economic statistics professor at Rome's Sapienza University, told Xinhua.

"Italy's economy is largely 'transformational', meaning it imports raw materials, makes them into something more valuable, and then exports them," Polli said. "That means the energy costs hit the process three times: when the raw materials are imported, during the production phase, and then when they're exported."

For Britain, Brexit has spelt new troubles for its trade with the European Union (EU). Border controls on products from the regional bloc were tightened this year, feared to cause more delays at ports and threaten supply disruption. Negotiations between London and Brussels on changes to the Northern Ireland Protocol are ongoing, but even if they prove successful, the threat of a trade war is unlikely to go away, according to Goodwin.

Under the protocol, part of the post-Brexit trade deal that came into force at the start of 2021, Northern Ireland continues to apply EU customs rules at its ports to allow goods to flow into the Republic of Ireland and the rest of the EU. This has subsequently created a new trade border between Northern Ireland and other parts of Britain, known as the Irish Sea border.

"The negative structural effects of Brexit are still working through the British economy, and this is the main reason why Britain's growth will lag behind other advanced economies in 2022," said Ray Barrell, professor of Economics and Finance at Brunel University London, in a recent Financial Times survey.

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