The eurozone economic system is about to shrink subsequent 12 months as excessive inflation and potential power shortages drag down output and set off a reversal within the fortunes of the labour market, in accordance with a Monetary Occasions ballot of economists.

Virtually 90 per cent of the 37 economists surveyed by the FT mentioned they thought the one forex zone was already in recession and the bulk forecast gross home product would contract over the entire of subsequent 12 months.

“Fuel markets in Europe stay a key threat,” mentioned Chiara Zangarelli, an economist at Morgan Stanley. “Extra provide disruptions, or a very chilly winter, may result in renewed tensions and costs rising once more, forcing one other spherical of adaptation and demand destruction.”

Most economists mentioned they thought Europe was previous the worst of its power disaster, sparked by Russia’s invasion of Ukraine. A light autumn allowed pure fuel storage amenities to stay close to to full capability.

Nonetheless, many worry the prospect of power rationing may return subsequent 12 months, notably if this winter is unusually chilly, depleting provides, or if fuel flows from Russia are lowered additional throughout 2023.

“The tail threat of fuel rationing has probably been averted for this winter, however the query of power provide for the following winter continues to be open,” mentioned Sylvain Broyer, chief economist for Europe Center East and Africa at S&P International Rankings.

European international locations have managed to decrease their dependence on Russian fuel imports by turning to Norway, the US and the Center East, together with switching to different power sources. However economists warn that, with out Russian provides, it will likely be a lot tougher to refill Europe’s essential fuel storage amenities forward of subsequent winter.

“Fuel storage ranges are dropping shortly now,” mentioned Carsten Brzeski, head of macro analysis at ING Financial institution. “There’s nonetheless the danger of an power provide disaster this winter. Furthermore, subsequent winter might be much more difficult.”

The downturn within the economic system, mixed with considerably larger mortgage prices throughout Europe, was additionally anticipated to set off a pointy reversal within the area’s housing market. The European Central Financial institution raised charges by 2.5 share factors over the course of 2022 and is predicted to extend borrowing prices additional in 2023.

Final 12 months’s predictions

Most of the economists polled by the FT final 12 months recognized larger than anticipated inflation as the key threat. Nonetheless, none of them anticipated the size of the power value shock that has despatched inflation to a report excessive within the bloc.

On common, they predicted costs would rise by 2.7 per cent this 12 months. Inflation soared into double-digit territory within the autumn, with the ECB lately forecasting it might common 8.4 per cent over the entire of this 12 months. That’s effectively above even the very best forecast made in final 12 months’s ballot, which was a 4 per cent prediction by Nick Bosanquet, professor of well being coverage at Imperial School in London.

The forecasters have been additionally too optimistic on progress. They predicted an enlargement of slightly below 4 per cent progress for 2022, which is effectively above the three.4 per cent forecast by the ECB earlier this month.

On common, economists forecast eurozone residential home costs would fall 4.7 per cent subsequent 12 months. Maria Demertzis, senior fellow on the Bruegel think-tank, mentioned home costs “won’t proceed to extend if we’re in a recession and rates of interest improve”.

The economists polled by the FT forecast the eurozone economic system would shrink by slightly below 0.01 per cent subsequent 12 months. That’s extra pessimistic than each the European Fee and the ECB, which predicted the bloc’s economic system would develop by 0.3 per cent and 0.5 per cent subsequent 12 months respectively.

Marcello Messori, an economics professor at Luiss College in Rome, mentioned additional rate of interest hikes by the ECB to counter the “extreme inflation” that was attributable to the power provide shock stemming from Russia’s invasion of Ukraine would “result in a extreme recession within the euro space”.

Inflation within the eurozone is predicted to stay above the ECB’s 2 per cent goal for a minimum of two extra years, in accordance with the economists. On common, these polled anticipate costs to rise by simply over 6 per cent subsequent 12 months and nearly 2.7 per cent in 2024.

These forecasts are decrease than these of the ECB, which earlier this month predicted value progress would common 6.3 per cent subsequent 12 months and three.4 per cent in 2024.

Line chart of Eurozone harmonised index of consumer prices (% change) showing Economists think the ECB is overestimating future inflation

Wage progress is predicted to be 4.4 per cent subsequent 12 months, in accordance with the common prediction within the FT ballot, which is beneath the 5.2 per cent forecast by the ECB.

On common, economists forecast unemployment would rise from a report eurozone low of 6.5 per cent in October to 7.1 per cent on the finish of subsequent 12 months.

Line chart of Eurozone unemployment rate (%) showing Jobless numbers expected to rise

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