Europe recession can affect PH markets

Facilities to receive and distribute natural gas are pictured on the grounds of gas transport and pipeline network operator Gascade in Lubmin, northeastern Germany, close to the border with Poland, on August 30, 2022. AFP Photo

By Ed Paolo Salting, Manila Times

EUROPEAN Union recession fears will definitely have an impact on the Philippines as a whole and the local markets, according to expert analysts.

The EU is also battling inflation as the eurozone's four largest economies — Germany, France, Italy and Spain — have had their growth forecasts for 2023 downgraded by the International Monetary Fund and World Bank.

The United Kingdom is also struggling with inflation, which is above 10 percent for the first time in 40 years as households struggle with rising energy bills as an offshoot of the Russia-Ukraine conflict.

What has the most impact on the EU economies is the Russia-Ukraine conflict, given its dependence on Russian crude and liquefied natural gas (LNG), which has been the subject of sanctions by both the US and EU member countries, who are also part of the North Atlantic Treaty Organization alliance.

The recent heat wave has also had an impact on agriculture, which was also affected by the conflict, given the inability of Ukraine to ship out grain exports from the Black Sea ports, which Russia has effectively blockaded.

Analysts at the Economist Intelligence Unit (EIU) of the economist group also said the inflationary pressure could go on for some time as countries in the bloc are looking for alternative sources of energy to curb their dependence on Russian LNG and crude oil, which will take some time to achieve.

"In the near term, we expect a recession in Europe in the last quarter of 2022-2023 as a result of energy shortages and sustained elevated inflation," the EIU said. "The winter of 2023-2024 will also be challenging, so we also expect high inflation and sluggish growth until at least 2024."

Higher interest rates are also imminent as the Federal Reserve in the US also declared a continued hawkish stance for interest rates on Aug. 27, 2022 until it wrestles inflation to the ground. The euro has lost parity to the US dollar as a result, and the European Central Bank has had to raise interest rates for the first time in 11 years. This will be tricky as there are a number of countries which are also in fiscal crisis, having wracked up additional debt at the height of the pandemic. A single rate hike is not possible for all EU member countries given the varying states of their respective economies.

Philstocks Financial Inc. senior research analyst Japhet Tantiangco and Rizal Commercial Banking Corp. chief economist Michael Ricafort said that a decline in the EU's economy has sparked concerns of a ripple effect across the globe, including the Philippines, in terms of exports and imports, investments and remittances.

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"Based on the latest data, in the first half of 2022, the European Union accounted for 11.6 percent of the Philippines' total exports and 6.5 percent of the Philippines' total imports, and generated 11.7 percent of OFWs' (overseas Filipino workers) cash remittances total which was sent to the country," Tantiangco explained. "In terms of direct investments, the whole bloc delivered 6.9 percent of the total equity investments to the Philippines in the first 5 months of 2022."

Regina Capital Development Corp. Managing Director Luis Limlingan added that the Philippines is not an isolated case, as all economies that are dependent on the importation of commodities for their energy requirements will be affected as the EU will all try to look for other crude sources while transitioning to alternative energy sources.

He also said that there could be an opportunity here as well as there is potential for the country to export to Europe what they could be lacking from the supply disruptions from Russia.

Tantiangco also pointed out that based on economic data, Europe still plays an important part in the Philippines' foreign transactions as a decline in their economy is expected to have negative effects on the local economy, which may also weigh on market sentiment for Philippine companies with European operations such as Emperador and Monde Nissin.