Euro zone economy grows 0.7% in the second quarter despite gas crisis and inflation surge

Growth in the euro zone economy accelerated in the second quarter of the year, but the region’s prospects get hit as Russia continues to reduce gas supplies.

The 19-member bloc registered a gross domestic product rate of 0.7% in the second quarter, according to Eurostat, Europe’s statistics office, beating expectations of 0.2% growth. It comes after a GDP rate of 0.5% in the first quarter.

The numbers contrast sharply with the negative annualized readings out of the United States for both the first and second quarter, as the euro zone continues to benefit from the reopening of its economy after the pandemic.

However, a growing number of economists are expecting the euro zone to slide into a recession next year, with Nomura, for example, forecasting an annual contraction of 1.2% and Berenberg pointing to a 1% slowdown.

Even the European Commission, the executive arm of the EU, has admitted that a recession could be on the cards — and as early as this year if Russia completely cuts off the region’s gas supplies.

Officials in Europe have become increasingly concerned about the possibility of a shutdown of gas supplies, with European Commission President Ursula von der Leyen saying Russia is “blackmailing” the region. Russia has repeatedly denied it’s weaponizing its fossil fuel supplies.

However, Gazprom, Russia’s majority state-owned energy giant, reduced gas supplies to Europe via the Nord Stream 1 pipeline to 20% of full capacity this week. Overall, 12 EU countries are already suffering from partial disruptions in gas supplies from Russia, and a handful of others have been completely shut off.

European Economics Commissioner Paolo Gentiloni said the latest growth figures were “good news.”

“Uncertainty remains high for the coming quarters: [we] need to maintain unity and be ready to respond to an evolving situation as necessary,” he said.

The GDP readings come at a time of record inflation in the euro zone. The European Central Bank hiked interest rates for the first time in 11 years earlier this month — and more aggressively than expected — in an effort to bring down consumer prices.

However, the region’s soaring inflation is being driven by the energy crisis, meaning further cuts of Russian gas supplies could push up prices even more.

“Given the challenging geopolitical and macroeconomic factors that have been at play over the past few months, it’s positive to see the eurozone experience growth, and at a higher rate than last quarter,” Rachel Barton, Europe strategy lead for Accenture, said in an email.

“However, it’s clear that persistent supply chain disruption, rising energy prices and record-breaking levels of inflation will have a longer-term impact.”

Meanwhile, Andrew Kenningham, chief Europe economist at Capital Economics, said Friday’s GDP figure would mark “by far the best quarterly growth rate for a while.”

“Indeed, news that inflation was once again even higher than anticipated only underlines that the economy is heading for a very difficult period. We expect a recession to begin later this year,” he added.