Eurozone headline inflation exploded 4.1% in October 2021, more than twice the European Central Bank’s target and matching the all-time-high for the data series launched in 1997. See the fash estimate from Eurostat here, some further analysis here, and the trend chart below.
Energy has been the culprit in the EU spike in inflation. Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in October (23.5%, compared with 17.6% in September), followed by services (2.1%, compared with 1.7% in September), non-energy industrial goods (2.0%, compared with 2.1% in September) and food, alcohol & tobacco (2.0%, stable compared with September).
And what of the EU growth prospects? In the third quarter of 2021, seasonally adjusted EU GDP increased by a lackluster 2.2% in the euro area and by 2.1% in the EU, compared with the previous quarter, according to a preliminary flash estimate published by Eurostat. Hardly inspiring excitement for the European economy. See the trend of EU GDP below.
Under the current convergence criteria (or “Maastricht treaty criteria”), the annual government deficit must not exceed 3% of GDP. In the second quarter of 2021, the seasonally adjusted general government deficit to GDP ratio stood at 6.9% in the euro area and 6.3% in the EU as reported by Eurostat. See trend data below.
So the meager 2.2% EU GDP growth is being supported by massive government deficits. Image what the real GDP number would be if there was no government and central bank stimulus – simply put, the growth in real terms would be quite negative.
Add in the EU hot inflation the Eurozone economy is troubling.
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