An economic downturn in Europe is looming. In what ways will this affect things?

An economic downturn in Europe is looming. In what ways will this affect things

The economies of Western Europe are entering the Middle Ages as natural gas costs have increased by nearly USD 100 per megawatt hour over the past year. As Russia responds with its own Ukraine war sanctions by cutting off the trickle of natural gas it was still flowing into Europe, forests are being cleared for firewood. Germany is now discussing decoupling from China after seeing businesses struggle with high electricity costs. They are concerned about the energy situation. Because of the record-high energy prices, they want to make it more difficult for manufacturers to outsource. The problem no longer appears to be temporary.

The International Monetary Fund has lowered its growth projections for each of the major economies in the eurozone—Germany, France, Italy, and Spain—for 2023 since the conflict and rising interest rates are expected to slow economic development. Inflation in the UK has exceeded 10% for the first time in 40 years due to increased energy costs for consumers. After a new rise in energy prices, the Bank of England predicts that inflation will peak above 13% in the fall and that the economy will enter a protracted recession.

Could a European recession finally save millions of American jobs?

In August, Goldman Sachs analysts estimated there would be a 30% chance of a recession in the US and 60% in Europe during the following year. The US may be less likely to suffer the same fate if this prediction comes true and Europe enters a recession before the US.

Former Federal Reserve economist Claudia Sahm stated in a post from September that the United States, as the largest economy in the world, the most significant producer of oil and natural gas, and with one of the strongest recoveries, should be able to weather the storm in Europe. “Their suffering will significantly reduce their demand, which will lessen our inflation.”

Over USD 270 billion worth of goods were exported by the US to the EU in 2021, or about 15% of all exports. Most purchases were made for machinery, mineral fuels, and aerospace equipment. If the European economy were to slump, demand from across the pond would fall, and exports would fall as a result. A weaker euro and consumers’ lower purchasing power in Europe will be to blame. It might aid in reducing price pressures in the US.

The value of the euro over the US dollar has fallen due to worries about the status of the European economy. The euro is still trading close to a 20-year low and has reached parity, or the rate of one euro to one dollar, in July.

According to Desmond Lachman, a senior scholar at the American Enterprise Institute, this dynamic is expected to continue in the coming months and may “assist us in our fight against inflation.”

A weaker European economy would hasten the significant fall in goods traded globally, while a stronger dollar would lower our cost of imports from Europe, according to Lachman.

In contrast, a weaker euro increases the cost of US goods for European consumers and businesses, decreasing their propensity to import US goods. A decrease in demand like this might also lower inflation.

Additionally, a strong dollar reduces revenues when US businesses convert the European sales they receive back into US dollars.

The aggregate earnings of S&P 500 corporations could be reduced by up to USD 100 billion, as a result this year.

The US economy, which is less dependent on exports thanks to its robust consumer spending, is probably well-positioned to withstand this fall, even though it may affect particular businesses.

It may be good news for inflation if less money is going through the pockets of corporations.

Although US energy costs have already started to decline recently, a downturn in Europe might help keep oil prices in control, much like the current slowdown in China has. According to Patrick De Haan, the head of petroleum analysis at GasBuddy, a recession “may exert downward pressure” on US natural gas prices; even though the US is currently supplying more natural gas to Europe is looking to shift away from Russia.

A recession in Europe is a dreadful conclusion that would put millions of people through pain. According to Lachman, issues that shouldn’t be disregarded include the fact that a European recession would impair “one of our main export markets” and increase “global financial market instability.”

Additionally, a recession wouldn’t be a panacea for inflation in the US.