European economic growth still faces significant challenges (economic perspective) Inflation rate | interest rate | economy

The European Central Bank recently held a monetary policy meeting and raised all three key interest rates in the eurozone by 25 basis points, with the deposit mechanism rate reaching 3.75%, a 22 year high. The announcement states that the European Central Bank will use inflation rate data as a basis to achieve a sufficiently high restrictive level for key interest rates in the eurozone, and maintain this level if necessary to promote a decline in inflation rates. According to Eurostat data, after seasonal adjustments, the Eurozone's GDP grew by 0.3% month on month in the second quarter of this year, while the EU's GDP grew zero month on month. Recently, the European Central Bank has also lowered its GDP growth expectations for the Eurozone to 0.9% and 1.5% for the next two years, respectively. A series of data shows that the current economic growth in Europe still faces significant challenges and uncertainties.

Since 2021, inflation in Europe has roughly gone through two stages. The first stage is affected by the instability of the global supply chain, with inflation rates in regional countries continuing to rise, exceeding the 2% price stability target set by the European Central Bank, and rising to about 5% by the end of 2021. The second stage was after the outbreak of the Ukrainian crisis, and due to the impact of the energy crisis and rising food prices, inflation rates in multiple countries continued to soar significantly, reaching double digits at one point. The inflation rates in Germany, France, and Italy have all reached their highest levels since the 1980s. Since November 2022, energy prices have decreased and inflation rates have begun to decline. Preliminary statistics from the Eurostat show that the inflation rate in the Eurozone in July was calculated at an annual rate of 5.3%, lower than the 5.5% in June. However, excluding energy, food, and tobacco and alcohol prices, the core inflation rate is still rising, reaching 5.5% in July.

To curb high inflation, the European Central Bank has raised interest rates 9 times in a row since July last year, a total of 425 basis points. But current inflation is still high and facing a new round of upward pressure caused by rising labor costs. The combination of high interest rates and high inflation has a restraining effect on economic activity. Since February, the Eurozone Business Confidence Index has been consistently declining. The Eurozone Manufacturing Purchasing Managers Index has also continued to decline, reaching a three-year low of 42.7 in July.

The European Central Bank recently released two important signals regarding the direction of monetary policy in the eurozone: firstly, the final interest rate level of this round of rate hikes is likely to be higher than previously expected; Secondly, the duration of high interest rates will be longer than previously expected. Analysis suggests that high inflation and tightening financing conditions may further suppress expenditure and investment expectations. From the perspective of fiscal policy, the current level of public debt in European countries is generally at a historical high, and member countries have limited space to stimulate their economies by expanding government spending.

While facing challenges, the European economic recovery also has some positive factors. The current "Next Generation EU" recovery plan is steadily advancing as scheduled, and public investment at the EU level will continue to drive economic recovery through a multiplier effect. The structural reforms of relevant member states will also inject more impetus into medium - and long-term economic growth. According to the European Commission's estimate, Italy's economy will grow by an additional 1.5 to 2.5 percentage points per year before 2026, thanks to the support of the "Next Generation EU" recovery plan. In Spain, the plan is primarily aimed at supporting the development of a green economy and digital transformation, with the potential to achieve an economic growth rate of 1.8% to 2.5% and create 250000 jobs by 2024. In addition, benefiting from diversified energy supply and reduced energy consumption, the current energy price pressure in the Eurozone has been somewhat alleviated, and consumer confidence index may achieve a rebound.

Another key factor affecting the recovery of the European economy is external demand, especially import demand from important trading partners. In 2022, due to the soaring import energy prices and rising export costs, the EU's trade deficit with major trading partners has significantly increased, with an overall foreign trade deficit of 432 billion euros. Since the beginning of this year, due to factors such as the decrease in imported energy prices, the EU's net exports to the outside world have begun to recover.

In terms of China Europe trade, China continues to maintain its position as the EU's second largest trading partner, the largest source of imports, and the third largest export market. According to statistics from the General Administration of Customs of China, China's import and export volume to the European Union reached 2.75 trillion yuan in the first half of this year, an increase of 1.9%. In the future, further deepening of economic and trade cooperation between China and Europe will provide important external support for European economic recovery.