ECB Head Alerts on Europe’s Economic Outlook Amid Inflation

ECB Inflation Impact on Indoor Vertical Farming

The outlook for the euro area economy – Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

The euro area economy grew by 0.8 per cent in the second quarter of 2022, mainly owing to strong consumer spending on services as the economy reopened. Economies with large tourism sectors benefited especially, as people travelled more over the summer. The still robust labour market also continued to support economic activity.

Notwithstanding this, we expect activity to slow substantially in the coming quarters. There are four main reasons behind this. First, high inflation is dampening spending and production throughout the economy, and these headwinds are reinforced by gas supply disruptions. Second, the strong demand for services that came with the reopening of the economy is losing steam. Third, the weakening in global demand, also in the context of tighter monetary policy in many major economies, and the worsening terms of trade will mean less support for the euro area economy. Fourth, uncertainty remains high, as reflected in falling household and business confidence.

These developments have led to a downward revision of the latest staff projections for economic growth for the remainder of the current year and throughout 2023. Staff now expect the economy to grow by 3.1 per cent in 2022, 0.9 per cent in 2023 and 1.9 per cent in 2024.

Inflation rose further to 9.1 per cent in August. Energy and food price inflation remained extremely elevated and were the dominant contributors to overall inflation. Price pressures are spreading across more sectors, in part owing to the impact of high energy costs across the whole economy. Almost half of the items in the inflation basket recorded annual inflation rates above 4 per cent in August and measures of underlying inflation remain high. While supply bottlenecks have been easing, their inflationary impact continues to gradually feed through to consumer prices. Similarly, recovering demand in the services sector is putting upward pressure on prices. The depreciation of the euro has also added to the build-up of inflationary pressures.

Looking at the labour market, wage dynamics remain contained so far. However, resilient labour markets and some catch-up to compensate for higher inflation are likely to push up wage growth.

Most measures of longer-term inflation expectations currently stand at around two per cent. However, signs of recent above-target revisions to some indicators warrant continued monitoring.

The baseline inflation projections of ECB staff have been revised up significantly; annual inflation is now expected to stand at 8.1 per cent in 2022, 5.5 per cent in 2023 and 2.3 per cent in 2024.

The risks to the inflation outlook are primarily on the upside, mainly reflecting the possibility of further major disruptions in energy supplies. While these risk factors are the same for growth, their effect would be the opposite: they would increase inflation but reduce growth.

Outlook on the Indoor Vertical Farming sector in Europe

As soaring energy prices further continue, and the outlook of energy supply cuts in certain countries may continue to halt greenhouse activities throughout the region. Greenhouse industry group Glastuinbouw Nederland says up to 40% of its 3,000 members are in financial distress. In addition, the cost of fertilizer, packaging and transport are all on the rise and jeopardizing margins. According to Reuters, even in warmer countries like Spain, fruit and vegetable farmers are grappling with a 25% increase in fertilizer costs.

The current outlook set by the ECB head may further continue to affect the sector and operators in the months to come.

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