Mounting external pressures will lead to a small contraction in key European markets

The eurozone looks poised to avoid a full recession in 2022, but risks remain tilted to the downside

While Q1 2022 has offered MNCs seemingly strong and resilient demand, executives should not be complacent and should expect to see a substantial easing and, in some cases, contraction in demand. Focusing on customer and market segmentation will be key to capturing existing opportunities. Regardless, MNCs should revisit their expectations for Europe and expect to see significant difficulties in offsetting weakness in their portfolio by diversifying their focus across Europe.


• Industrial output in Germany contracted by 3.5% YOY (and 3.9% MOM) in March, signaling further weakening in output.
• Eurozone inflation rose to 7.5% YOY in April on the back of a surge in energy prices and a sharp increase in food inflation.
• Preliminary data indicates Italy’s economy contracted by 0.2% QOQ in Q1 2022, with weaker domestic and external demand expected to weigh on output in the coming quarters.
• Spain’s economy expanded by 0.3% QOQ in Q1 2022, but the sharp drop in household consumption bodes negatively for Q2 growth amid elevated inflation. 
• In March, French industrial production slid by 0.5% MOM, indicating tougher months are likely ahead.

Our View

Mounting external pressures, including a slowdown in the US and China and surging energy prices, have necessitated substantial revisions to our growth outlook for Europe, with some key markets, such as Italy and Germany, now projected to see a mild recession, followed by a slow and gradual recovery. While sanctions on Russian oil imports have been obstructed by Hungary’s refusal to support additional measures unless it is compensated for the shock to its domestic energy network, its position likely remains a negotiation tactic that is aimed at unlocking some of the funding that the EU had previously frozen over the rule-of-law concerns. As such, the adoption of additional measures on Russian oil remains highly likely and will further increase price pressures across the continent. Northern European markets have already seen a drop in output, which signals further weakening of activity and softening of domestic demand. While markets such as Poland and Hungary appear resilient and attractive, their inherent vulnerabilities to gas disruptions throughout the EU, should Russia fully suspend exports to Europe, will contribute to an uneasy and risky market environment. The UK’s relatively low exposure to Russian energy exports and a pronounced recovery in domestic service industries should help avoid recession in 2022, but growth in 2023 will remain muted as domestic demand loses momentum.

The outlook for Southern Europe is somewhat varied. France’s lower inflation rate will leave it less vulnerable than other economies, though GDP growth will still slow significantly this year. In Spain, despite heightened price sensitivity among consumers, pent-up travel demand should lead to a moderate improvement in tourist arrivals, which will help prevent a recession this year. Italy’s economy is highly exposed to a slowdown in Germany, which will push the economy into contraction. Meanwhile, consumer spending should prove slightly more resilient among emerging markets, with Serbian consumers partially insulated from higher natural gas prices and Croatia likely to benefit as a more budget-friendly tourist destination this year. Although Romania’s lower cost profile will support industrial production, output will be constrained by ongoing supply chain issues and weaker external demand.

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