Wall Street Journal: Interest rate hikes and other headwinds herald miserable economic winter in Eurozone

US newspaper the Wall Street Journal stated that the European Central Bank's decision to raise the interest rate last week for the 9th time in a row since the beginning of the monetary tightening policy last year to control inflation, in addition to the stagnating Chinese demand for European goods and other factors that do not work in favor of the eurozone, portends another miserable economic winter in the eurozone this year.In a report, the newspaper said that rising borrowing costs and stagnating Chinese demand for European goods, and other headwinds, which also include the continuing war in Ukraine and stubbornly high inflation, could pave the way for another miserable economic winter for the eurozone this year, adding that the region is likely to keep underperforming the US for now, according to fresh data and recent sentiment surveys.According to the Wall Street Journal, the data released by the European Unions statistics agency said that after briefly shrinking at the end of last year, the currency areas economy returned to growth in the three months through June. The combined gross domestic product of the 20 countries that use the euro grew at an annualized rate of 1.1% in the second quarter. However, the eurozone economy is unlikely to return to the rates of growth it recorded before Russias invasion of Ukraine sent energy and food prices surging and shattered business and household confidence.European Central Bank President Christine Lagarde said Thursday, "the near-term economic outlook for the euro area has deteriorated, owing largely to weaker domestic demand....High inflation and tighter financing conditions are dampening spending."Eurostat didnt provide a breakdown of the factors driving the return to growth, but figures from individual countries indicate that consumer spending held up better than during the winter months, when high energy bills left households with less to spend on other goods and services.In a separate statement, Eurostat said that the annual rate of consumer-price inflation fell to 5.3% in July from 5.5% in June to reach its lowest level since the month before Russias invasion of its neighbor. The core rate of inflation, which excludes volatile items such as energy and food, was unchanged at 5.5%With wages rising faster than over recent decades, some parts of Europe may soon follow the US in seeing a return to growth in real wages. Despite unusually high temperatures, southern Europe is seeing a return to prepandemic levels of international tourism. Spain received 8.2 million international tourists in May, a 17.6% increase from the same month of 2022.Nonetheless, the Wall Street Journal believes that rising borrowing costs are a growing drain on household budgets.The Wall Street Journal quoted a senior officer at consumer-goods giant Unilever as saying "shoppers are buying less with smaller basket sizes and are both down-trading and shopping less often."According to a survey released by the ECB last week, businesses are also under pressure while business demand for new loans is at a record low, an indication that investment spending is set to weaken. "A sharp downturn in investment is now under way," said Claus Vistesen, an economist at Pantheon Macroeconomics.Surveys of purchasing managers for July conducted by S&P Global point to a continued decline in manufacturing activity, while the much larger services sector has slowed. So even as the eurozone returns to growth, a fresh contraction might be under way, the newspaper explained.The newspaper also noted how unlike the past, China is not helping. Eurozone businesses had expected to sell more to Chinese customers as the worlds second-largest economy reopened after the government dropped its zero-Covid policy, but the pickup in activity has been sluggish. In the first five months of this year, Europes exports to China were just 1.2% higher than during the same period of last year.It added that because of the weaker demand for its exports, economists at Bank of America have lowered their forecast for eurozone growth this year to 0.3% from 0.4%. As the European economy with the greatest reliance on exports to China, they see Germany as most vulnerable.Germanys economy stagnated in the three months through June after contracting in the previous quarter, while Italy was the laggard among the eurozones larger members, with a surprise decline in its GDP after a strong start to the year. The French economy accelerated, growing by 2.2% despite widespread protests against the governments plans to change the pension system.The Wall Street Journal concluded by noting that the combination of weak growth and falling inflation reduces the likelihood that the European Central Bank will raise its key interest rate for a 10th time when policy makers next meet in September. Some economists argue the central bank has already pushed its key rates too high.The newspaper quoted Erik Nielsen, an economist at Italys UniCredit, who wrote a note to clients saying, "the damage of the ECBs sledgehammer approach during this past year is now beginning to show, and itll only get worse from here as the lagged effects of these past 12 months huge tightening rolls in over the real economy."