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The ECB is haunted by fears of a recession ahead of the rate hike in July

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Policymakers at the European Central Bank (ECB) put on a brave face at their annual meeting in the hills above the Portuguese capital of Lisbon, forecasting continued economic expansion despite looming gas shortages, but private talks were increasingly dominated by recession fears.

The economic crisis has slowed sharply this year amid the aftermath of Russia’s war in Ukraine, wiping out the economic recovery from the pandemic lockdown and raising the risk that any further escalation of the conflict could stifle remaining growth.

That would make life more difficult for the ECB, which is preparing for its first rate hike in over a decade to curb inflation, as tightening monetary policy in a recession risks exacerbating the downturn.

“I don’t expect a recession, and indeed I think there is a possibility of a positive surprise,” ECB policymaker Bostjan Vasle said at the annual conference in Sintra. “Services are booming and the job market is tight.

“Just a few visible examples: crowded airports, restaurants and holiday destinations across Europe indicate resilience,” said Mr Vasle, head of the Slovenian central bank.

The problem is that Europe is mired in huge energy dependency and rising oil prices represent a de facto transfer of wealth worth 2-3 percent of GDP – much of it to Russia.

Brent crude oil prices are up about 50 percent year-on-year, while gas and electricity prices have more than doubled in some countries, weighing on household consumption and investment and squeezing corporate margins.

Underscoring the bleak outlook, PMI data and the German Ifo survey this month both fell more-than-expected and showed deteriorating business morale, although neither pointed to an outright recession. A key sentiment indicator also fell, albeit less than some feared.

However, the economy has some reserves, particularly as the pandemic has forced households to save cash and created a buffer that will now isolate the bloc.

“I find it difficult to imagine a deep recession without further negative shocks. We have very tight labor markets, overspending due to the Covid crisis, likely improvements in congestion and an easing of supply constraints,” said Pierre Wunsch, governor of Belgium’s central bank.

“There are no major imbalances in the economy that should provoke a deep and prolonged recession.”

Privately, however, policymakers were less optimistic, fearing that energy supply problems would persist throughout the year, eroding household spending power and inevitably dragging the bloc into a recession.

“I have little doubt that we are entering a recession,” said a third ECB official, who asked not to be named.

https://www.independent.ie/business/world/recession-fear-haunts-ecb-ahead-of-july-rate-increase-41805131.html The ECB is haunted by fears of a recession ahead of the rate hike in July

Fry Electronics Team

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