Five Economic Charts to Watch in 2022: Europe

As the highly contagious COVID-19 omicron variant spreads rapidly across Europe, many countries are reinstituting lockdowns and mandating vaccinations to combat the spread of the virus. What impact could this have on Europe’s economic recovery? Let’s examine some of the data that will guide us in monitoring the European economies in 2022.

The Region Faces a Renewed Surge in Covid Cases

First identified in late November, the highly contagious omicron variant has spread rapidly around the world and is now the dominant Covid variant in many countries. In Europe, the new variant has led to a fourth or fifth wave of infections that for many countries is worse than any of the prior peaks. Hans Kluge, Regional Director for Europe at the World Health Organization (WHO), recently urged European governments to prepare for a “significant surge” in Covid cases in the region. He warned of the impact of “another storm” that would severely strain health systems across the continent.

In Germany, a new set of restrictions went into effect on December 28 limiting the size of private gatherings, closing nightclubs, and holding large sporting events with no fans in attendance. In the UK, London’s New Year’s Eve festivities were canceled amid a rise in cases and with the National Health Service severely strained. Planned New Year’s Eve events were also canceled in Paris, even as France focuses on its vaccine and booster push. Spain and Italy, two countries hard hit in the early days of the pandemic, have reinstituted restrictions on gatherings and are requiring health passes for entry into many public spaces.

Analysts Continue to Lower Eurozone GDP Forecasts

With the surge in Covid cases across continental Europe and increased restrictions on movement, the economic growth outlook has become bleaker in recent months. According to FactSet Economic Estimates, the median estimate for real GDP growth in the fourth quarter of 2021 is currently just 0.6% quarter over quarter; this compares to an expectation of 1.2% growth back in July, when the outlook was a bit rosier. Analysts have also halved their forecast for the first quarter of 2022, projecting quarter-over-quarter growth of 0.4% compared to the 0.8% forecast in October. Some of that growth has been pushed to the second quarter of 2022, which is now expected to see growth of 0.9%.

The Continent Faces Soaring Natural Gas and Electricity Prices

European natural gas prices skyrocketed in late December, setting new records amid forecasts of below-freezing temperatures and a supply shortage heading into the winter months. Futures prices for the Dutch Title Transfer Facility (TTF), a European gas benchmark, jumped above 180 euros per megawatt hour on December 21 for contracts with delivery in January 2022. Contracts for delivery in February 2022 are currently trading at around 90 euros per megawatt hour, still well above the 20-euro short-term contract price of one year ago. While gas demand is surging, supply is constrained by the German government’s decision not to approve the operation of the Nord Stream 2 pipeline and reduced Russian fuel exports.

The high price of natural gas doesn’t just impact heating bills; it will also push electric bills higher. According to Eurostat, natural gas was the second largest source for electricity generation in the European Union (EU) in 2020, fueling 20.1% of power production. On top of the natural gas supply problems, lower wind activity last year in the North Sea reduced wind power generation. As Europe has focused on moving away from fossil fuels, it has come to rely more and more on renewable sources of energy. In 2020, wind power was the EU’s third largest source of electricity.

Inflation Exceeds ECB Target into 2022

Euro area inflation has jumped in recent months, primarily due to soaring energy prices. In November, the harmonized consumer price index (HCPI) was up 4.9% compared to a year earlier; energy prices were up a whopping 27.5% for the month. The core HCPI, which excludes the volatile energy and unprocessed food components, was up 2.6% year over year. These growth rates are well above the European Central Bank’s (ECB’s) 2.0% inflation target, but the ECB projects that inflation will “decline sharply during the course of 2022, as high energy price inflation abates and supply catches up with demand.” The ECB’s latest forecast shows Eurozone inflation falling back below the bank’s target by the end of 2022.

Bank of England Leads the Way with Rate Hikes

In the face of sharp increases in prices, in December the Bank of England (BoE) became the first major central bank to raise interest rates since the beginning of the COVID-19 global pandemic. The BoE’s Monetary Policy Committee voted by a majority of 8-1 in favor of increasing the Bank Rate from 0.1% to 0.25%, the first rate increase since the summer of 2018. While the ECB is not expected to raise rates in 2022, other central banks in Europe have already begun instituting rate hikes. Norges Bank, the central bank of Norway, has already raised rates twice in recent months (September and December 2021); the policy rate now stands at 0.5% compared to the zero percent rates that had been in place from May 2020.

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