European Economy Continues to Face Inflationary Pressures (International Viewpoint)

Source: People's Daily

Preliminary statistics released by Eurostat recently showed that the inflation rate in the eurozone in March was 6.9% on an annualized basis. Among them, the price of food, tobacco and alcohol increased by 15.4% year-on-year, the price of non-energy industrial products rose by 6.6%, the price of service rose by 5%, and the price of energy decreased by 0.9%. Core inflation, excluding energy, food, tobacco and alcohol prices, was 5.7% that month, a record high.

Alfred Carmer, director of the International Monetary Fund's European Department, said at a press conference during the IMF and World Bank 2023 spring meetings on April 14 that inflation in most emerging economies and some advanced economies in the region remains in the double digits. While energy prices have fallen, household spending is still increasing rapidly. Despite the recent performance, the trend of economic growth in Europe is weakening, and countries in the region are facing the triple challenge of curbing inflation, maintaining economic recovery and maintaining financial stability.

"Cost pressures are trickier than we predicted"

Recently, a large supermarket chain in Berlin, Germany, launched a special price sunflower oil, the price of 1 liter is 1.99 euros, at least 0.5 euros lower than other supermarkets, this preferential measure has attracted many customers, and the products are quickly sold out. Two years ago, the average price of 1 litre of sunflower oil in German supermarkets was 0.99 euros. The price of cucumbers has been soaring, even in cheap supermarkets, it costs 1.49 euros per stick, and even as high as 3.29 euros in mid-to-high-end supermarkets. In previous years, the price of a cucumber usually did not exceed 0.7 euros. "High-priced cucumbers" have become a hot topic on German social media recently.

Since the beginning of this year, German inflation has continued to run at a high level, reaching 8.7% in February and 7.4% in March, which is less than the market expected. In 2022, Germany's full-year inflation rate was 6.9%, significantly higher than the 3.1% in 2021. Ruth Brand, director of Germany's Federal Statistical Office, said inflation rose to record highs in 2022, mainly driven by soaring energy and food prices since the Ukraine crisis.

At present, the inflation rate in major European countries is still at a high level. Inflation in France, Italy and Spain reached 5.7%, 7.6% and 3.3% respectively in March. In Belgium, prices of necessities also rose sharply, with egg prices rising 39% year-on-year in February, milk prices rising by 33% and potatoes rising by 25%. According to the latest data from the Belgian Consumers Association, a family of two now spends about 512 euros a month on groceries, up an average of 85 euros per month from last year.

Commerzbank economist Ralf Solvin commented that the rise in prices in the eurozone is actually accelerating, regardless of energy prices, which puts pressure on the ECB to raise interest rates further. European economist Anna Andrade believes that the decline in price growth will not be as fast as we expect, "and the risk is that the cost pressure is trickier than we predicted." ”

"Many consumers are still insecure"

In Belgium, inflation continues to put pressure on people's lives. According to local media, about 1 in 4 Belgian households said their families were financially tight. A primary school principal said she observed that many children had only bread in their lunch boxes.

Our reporter interviewed 10 random consumers in Belgian supermarkets, and they unanimously agreed that prices rose too fast. Two of the consumers told reporters that they have recently started frequenting the advent food counter in supermarkets to buy discounted food, whereas they used to tend to buy fresher food. Three consumers said they now carefully flip through supermarket specials and hoard them when the product is on sale, even though the current specials are more expensive than they were a year ago.

High inflation also puts a lot of pressure on business operations. In March, German supermarket brand Edkar announced that it would terminate its cooperation with Mars after price negotiations with Mars Group broke down. German media reported that inflation led to rising costs, Mars asked for a price increase, but Edka thought the increase was too high, and in the end the two sides failed to reach an agreement, including Coca-Cola, Wrigley chewing gum and more than 450 other goods will have to withdraw from the supermarket's shelves.

The decline in purchasing power has led to a continued contraction in eurozone consumption. The latest data released by the German Federal Statistical Office showed that retail sales in Germany fell by 7.1% year-on-year in February, which is the fifth consecutive month of decline. German retail industry researchers expect the biggest drop in sales this year since the international financial crisis, which is expected to fall by 3%. Stefan Gent, CEO of the German Retail Association, said: "Many consumers still feel insecure. ”

Yang Chengyu, associate researcher at the Institute of European Studies of the Chinese Academy of Social Sciences, told this reporter that high inflation has become the biggest challenge facing the European economy. Even before the escalation of the Ukraine crisis in February last year, there were signs of rising inflation in Europe, and the price of natural gas and other countries had already gained momentum. Since the Ukraine crisis, European energy and food prices have continued to rise, which in turn has driven up electricity prices, and then transmitted to the manufacturing industry, household consumption and service industries through the rise in intermediate goods and transportation costs, forming a comprehensive inflation situation. At the same time, the European manufacturing industry may relocate due to energy cost factors, or due to the obstruction of the industrial chain and supply chain, causing the overall pressure on the supply side and stimulating the inflation spiral.

"Stronger action may have to be taken"

In the face of the inflation problem, European countries have launched a number of countermeasures. The German government has successively introduced several rounds of huge fiscal relief programs, mainly including the issuance of energy subsidies and the reduction of people's tax burden. At the end of last year, Germany introduced measures such as a 49-euro national short-distance public transport monthly pass, limiting gas and electricity prices, issuing one-time subsidies for energy costs, and increasing housing subsidies for low- and middle-income families. Bundesbank President Joachim Nagel said that due to the effect of the ECB's interest rate hike policy will lag for a while, it is expected that German inflation will remain at a high level of about 7% this year and is expected to be significantly reduced next year.

The French government has made curbing inflation a top priority for now, planning to spend 45 billion euros on energy subsidies this year to increase the price of domestic gas and electricity by no more than 15%. Not long ago, the French government also reached an "anti-inflation season" agreement with a number of supermarkets, including Carrefour, promising to provide customers with "the lowest possible price" on daily food by June. The government will also provide food stamps to the poorest people on a provincial basis in the coming months.

The Spanish government has also taken a package of measures to combat inflation this year, including reducing the value-added tax on basic foods such as bread and milk from 4.0% to zero, reducing the value-added tax on cooking oil from 10% to 5%, and providing financial assistance to low-income families.

Recently, ECB Executive Member Isabel Schnabel said that high core inflation is more persistent than headline inflation worries monetary authorities and the ECB "may have to act more forcefully." ECB President Christine Lagarde also said that current eurozone inflation is still too high and there is no evidence that inflation is declining, "which makes it essential to move forward with a strong strategy."

In order to curb inflation, the ECB has raised interest rates sharply for a total of 350 basis points six times in a row since July last year. However, the ECB's continued adherence to tightening has also raised concerns among some experts. Carsten Brzeski, head of macro research at ING, believes that the most aggressive monetary tightening policy since the establishment of the eurozone has adversely affected the economy, and the ECB will strike a difficult balance between price stability and financial stability in the future. Camer said recent challenges to stability in Europe's banking sector and the broader financial sector have clouded short-term growth prospects. Factors such as tight labor markets, another recovery in energy prices and heightened geopolitical fragmentation could hamper growth and lift inflation. Moreover, financial stability risks, if not effectively contained, can lead to crises and drag down economic growth.

(Berlin, Brussels, Madrid, Beijing, April 17)