Home Financial Record Omicron slows down the economic rebound in the euro zone; inflation at an all time high

Omicron slows down the economic rebound in the euro zone; inflation at an all time high

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FRANKFURT – Eurozone economic sentiment fell more than expected last month as inflation hit a new high, indicating the economy is under further stress as rising coronavirus infections force governments to tighten restrictions.

With record-breaking infections almost daily as the Omicron variant sweeps across Europe, growth is expected to take a hit around the turn of the year, even as governments have largely avoided the debilitating measures that crippled their economies a long time ago. year.

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Foreshadowing the pain, the European Commission’s economic sentiment indicator, a key indicator of the bloc’s economic health, fell more sharply than expected in December to reach a level last seen in May. The outlook for services has deteriorated significantly and employment expectations have also fallen.

In Germany, the eurozone’s largest economy, the slowdown is already evident in the hard data.

Supply chain bottlenecks held back Germany’s vast industrial sector for most of the last quarter and industry, which was believed to be rebounding, unexpectedly stumbled in November.

Output fell 0.2% on the month, despite expectations of a 1% increase, reinforcing the view that Europe’s largest economy shut down in the fourth quarter of 2021, with no relief in seen for months.

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“Unfortunately, this is where the rebound in German industry ends for the moment. The fourth wave of the pandemic and Omicron should put industrial activity back into hibernation, ”said ING economist Carsten Brzeski.

“We will have to wait until spring for German industry to return to a fully sustainable recovery path. “

In a rare bright spot for the bloc, retail trade rose unexpectedly in November, indicating that at least consumers remained bullish as the Christmas shopping season approached.

The problem is that heavy household spending, which was forced to save money last year amid restraint, is pushing consumer prices to new highs.

Inflation unexpectedly hit 5% last month, a record for the currency bloc of 19 countries and an uncomfortable reading from the European Central Bank, which has consistently underestimated price pressures.

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When the economy rebounded from its initial pandemic shock last year, price growth took off, mainly due to rising oil and gas prices.

Adding to the upward pressure, supply chain bottlenecks reduced the availability of consumer products, while households, dipping into the money they had amassed, began spending on everything. , from new cars to restaurant meals.

While most of these drivers of inflation are temporary, many, including some influential policymakers, doubt the ECB’s sympathetic rhetoric that price growth will return to below its 2% target by the end of the year. year.

Part of their concern is that underlying price increases – or inflation excluding volatile food and fuel prices – are also above target, suggesting that sectors prone to low inflation over the past year. decade are adjusting.

Nonetheless, with the stimulus measures being extended just a few weeks ago, the ECB is unlikely to reconsider its policy until March, especially as Omicron darkens the outlook.

There was a glimmer of good news for the central bank in the Commission’s sentiment survey with eurozone entrepreneurs lowering their price hike expectations for the first time in more than a year last month. (Reporting by Balazs Koranyi; Editing by Toby Chopra)

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