Summer tourism lights up the eurozone economy, but the cost of living crisis casts a shadow

Perched on a cliff on the Amalfi Coast, overlooking the azure waters of the Mediterranean, Hotel San Pietro Positano is experiencing its best year as pandemic weary travelers, especially Americans, flock to Italy.

The hotel, which charges an average rate of € 1,800 per night for a room this summer, noticed a pickup in April and is fully booked until mid-October. “No one has been able to come for two years,” said co-owner Vito Cinque. “Now everyone does it.”

The eurozone’s tourism boom, aided by the fall of the single currency against the dollar, is a bright spot in a region that economists are increasingly worried about will fall into recession in the second half of this year.

Data on Friday showed that the currency area economy grew 0.7 percent between the first and second quarters, a stronger than expected by economists of 0.1 percent and in stark contrast to US gross domestic product data for the same period, which showed the world’s largest economy shrank for the second consecutive quarter.

France, Italy and Spain all had better-than-expected numbers as visitors flocking to Mediterranean destinations and enjoying city breaks helped offset the impact of rising energy bills and higher food prices on domestic demand.

Mohamed Ichem, who sells macarons in Ladurée near the Tuileries gardens in Paris, said most of his customers speak English. “Tourists spend without counting,” Ichem said. “My biggest order was eight boxes of 54, for over € 1,000.”

Adama Touré, who runs Le Castiglione, a brasserie just minutes from the Ritz hotel on the French capital’s elegant Place Vendôme, said: “Americans have fun in every way. . . I just served a plate of caviar to a group of them ”.

Ignacio de la Torre, chief economist at asset manager Arcano, calculated that around a third of Spain’s second-quarter growth – which was 1.1 percent, up from just 0.2 percent in the first three months. of the year – was driven by tourism.

María Frontera, president of the association of hoteliers on the Spanish island of Mallorca, said the occupancy rate reached 93% this month, five percentage points higher than in July 2019, the summer before the pandemic began. . “We expect similar levels for August and demand for autumn continues to grow,” she said.

But as the climate cools, European businesses and consumers will face greater economic pressure. The war in Ukraine has left factories in the region, fresh from the pandemic, to face new difficulties in the supply chain. Germany’s more manufacturing-dependent economy stagnated in the second quarter, missing analysts’ expectations of a slight expansion and highlighting how dire the situation is for northern economies that can rely less on hospitality.

The invasion of Russia and doubts about Moscow’s willingness to maintain the flow of gas in Europe have triggered an increase in household energy costs, which have risen by 40% in the past 12 months, while food costs have increased by 10% in the last 12 months. same period, leading to the worst cost of living crisis in decades.

Marina Lalli, president of the National Federation of Travel and Tourism Industries in Italy, said resorts that cater to more ordinary Italian families are under pressure. “People have to struggle to pay for utilities, fuel for their cars and even food prices have gone up. [Italians] they are deciding not to go on vacation at all or, instead of staying 10 days, they are staying a week or just three days. ”

Last week’s confidence data from Eurostat, the European Commission’s statistical office, shows that consumers are more reluctant to make large purchases than at any time since the first months of the pandemic.

That pessimism is unlikely to stop the European Central Bank from raising rates further in the fall, after making its first hike in decades, when it raised its benchmark deposit rate by 50 basis points to zero in late July.

“We expect the ECB to rise [the rate] by an additional 100 basis points by the end of the year to help prevent any increase in inflation expectations as inflation rises further in the coming months, ”said Holger Schmieding, an economist at Berenberg Bank.

Overall, eurozone inflation rose to a new all-time high of 8.9% in the year through July, according to Friday data from Eurostat, the European Commission’s statistical office. The key measure, which eliminates soaring food and energy costs, also increased by 4%, more than double the ECB’s 2% target.

With rising interest rates and tourists returning home, economists expect growth figures to deteriorate, especially if tensions with Moscow intensify. Russian energy company Gazprom has reduced flows through its Nord Stream 1 pipeline, which runs beneath the Baltic Sea to Europe’s largest economy, to just 20% capacity, levels which, if sustained, would cause a severe recession in Europe. Europe.

“This quarter brings good news, but it doesn’t tell us much about the underlying health of the economy,” said Gilles Moëc, chief economist at French insurer Axa. “What happens after the end of the summer?”

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