Winter could bring a recession to Europe – due to the higher cost of living caused by soaring energy and food prices. The inflation may aggravate primarily owing to the geopolitical tensions with Russia as most nations in the Eurozone are dependent on Russia for their energy requirements, says Amundi Asset Management.

“The recession we expect for the Euro Zone will be a real one, with a decline in domestic demand and possibly some increase in unemployment rates. Still, a mild recession and utilising furlough schemes like those implemented during the Covid-19 pandemic could help in the region avoiding a significant increase in the unemployment rate,” says Vincent Mortier, Group Chief Investment Officer at Amundi. 

The investment management firm says that although there are some country-specific fiscal support measures lately, the EU is now mobilising its institutional powers to frame a collective response. These initiatives may help safeguard consumers from the impact of soaring energy prices in the near term but may be inflationary in the medium term.  

According to Mortier, the near-term priority of the ECB will be to check inflation, which is impacting the cost of living. The bank is also concerned about inflation expectations and, therefore, there may be aggressive rate hikes at the bank’s forthcoming policy meetings.  

Amundi says equities will be adversely affected by a Europe recession because declining consumption affects corporate earnings while rising rates affect valuations. Moreover, a weak global economy will prove to be negative for European companies owing to their large international operations. As a result, investors should seek quality attributes in companies that can endure the prevailing stagflationary environment.

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