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Americas+1 212 318 2000
EMEA+44 20 7330 7500
Asia Pacific+65 6212 1000
By Rakteem Katakey
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Europe ended January with good news — it’s on course to avoid a recession this year after unexpectedly growing at the end of 2022. More surprise followed on Wednesday with inflation slowing quicker than forecast following a sharp turnaround in energy markets.
Euro area gross domestic product edged up by 0.1% in the fourth quarter, defying economist estimates for a contraction of 0.1%. The region will expand 0.7% this year, and 1.6% in 2024, the International Monetary Fund said in a report on Tuesday.
That will have a lot of politicians and policy makers letting out a sigh of relief. Less than two months ago, Europe was reeling from dire forecasts for a recession sweeping through the region. Industries were shutting down because energy costs were too high, inflation was surging to multi-decade highs, and jobs and livelihoods were at stake. The UK is still facing a barrage of strikes partly as a result of the bleak economic times.
Euro-area economy unexpectedly grew in final quarter of 2022
But the energy market has dramatically changed. An unusually warm winter and strong imports of liquefied natural gas have helped keep gas inventories at 73% full, about 20 percentage points higher than the 10-year average. Forecasts for a mostly mild February could ensure stockpiles end the winter at least half full, making it easier to replenish them well in time for the next heating season even without the usual Russian supply.
Benchmark gas and power prices have slumped about 60% in the past two months, taking the edge off the energy crunch. A stronger-than-expected economy would give central banks and governments more firepower to tame inflation, according to Jamie Rush, chief European economist at Bloomberg Economics.
“An ongoing squeeze on household spending power means the euro-area economy could yet shrink in” the first quarter, he said. “With energy costs plunging, the big picture is that any winter downturn is likely to be shallow. The economy holding up better than feared means the ECB can stay focused on tackling high and persistent inflation.”
Price pressures are already easing with the inflation rate dropping more than expected on Wednesday. But it remains way above the European Central Bank’s 2% target. The market will be closely watching for clues from the bank this week on monetary policy direction for the rest of the year. An easing of the most aggressive bout of interest-rate increases in the ECB’s history would be the next step in loosening the European crisis.
…but core numbers stay at record high
Households are still struggling with high costs, and while gas prices have dropped, they remain double the typical levels for this time of the year. Some government aid in the UK, for example, is being pulled back in April, that could saddle businesses with steep bills.
But from where it was in the autumn, Europe has weathered the energy storm relatively well. In the weeks ahead, as the cold days of winter turn warmer, things are starting to look much brighter.
Previous Posts on Europe’s Energy Crunch Blog
Jan. 31: Europe Is Amazingly Quick to Cut Fossil Fuels When It Tries
Jan. 30: Europe’s Growing Dependence on Costly LNG Isn’t Inevitable
Jan. 27: Will Europe’s Sanctions on Russian Diesel Cause a Bang or a Whimper?
More energy coverage
Shell Revives Its Effort to Market ‘Carbon Neutral’ Fossil Fuels
London Heat Waves Spark Highest Death Toll Among European Cities
Biden to Signal Alaska Oil Project Support, Defying Greens
Coordinating editor: James Herron
Data analysis by: Leonid Bershidsky
Energy Crisis Index methodology:
The Bloomberg Energy Crisis Index measures the level of stress on energy systems across a selection of major European economies using five parameters: gas storage, percentage full (data sourced from Gas Infrastructure Europe); power load, in GW (from ENTSO-E); gas and power prices per MWh for the day ahead (from relevant exchanges or brokers); and temperature forecast for the day ahead (based on Weather Company data using the ECMWF model.) On the graphic, gas and power prices in local currencies are displayed in euros.
For each parameter, data is adjusted for seasonal variation and a z-score is calculated for every observation for the last four years (one-year in the case of power and gas prices). For the most recent z-score, the percentile score is calculated.
For gas storage and weather, the 100th percentile (0% of z-scores in the last two years are higher) is the “best” result, so the number of points equals 100 minus the percentile. For the power load and the day-ahead gas and power prices, the 0th percentile (100% of z-scores in the last two years are lower) is the “best” result, so the number of points equals the percentile. The average of all variables gives the overall score for each country, with 0 representing the lowest stress and 100 the highest.