In the third quarter of 2022, the number of applications for bankruptcy increased by 16.3% compared to the results of the second quarter. Such data leads Eurostat. The indicator has been growing for five months in a row. Thus, in the II quarter of 2022, an increase of 2.9% (on a monthly basis) was recorded. How the bankruptcy of European enterprises will affect the global and Russian economy and whether it is worth waiting for the mitigation of anti-Russian sanctions in the near future – in the material of Izvestia.
Time for tough decisions
Analysts at Eurostat explain the trend in bankruptcies by the rise in energy prices. According to the structure of bankruptcies, the companies are heterogeneous: plus 24% – in the housing and communal services sector, plus 17.8% – financial insurance services, plus 16.2% – production. Least of all, the wave of bankruptcies affected the sphere of storage and transportation and IT.
By country, most bankruptcies were in Hungary (+110.6%), Spain (+66.1%) and Lithuania (+4%). At the same time, fewer bankruptcies were recorded in Romania (-36.1%), Cyprus (-32.7%) and Estonia (-21.3%).
The European economy, like the world economy, is steadily moving towards a recession, says Sergey Khestanov, Associate Professor of the Department of Stock Markets and Financial Engineering, Faculty of Finance and Banking (FFB) of the RANEPA.
“However, formally, a recession (two consecutive quarters of a decline in GDP) will most likely occur in mid-2023. Of the short-term problems, the energy crisis in Europe is a really important factor, since it greatly accelerates inflation and reduces household resources available for other spending: in many countries, the cost of utilities is growing noticeably and quite sensitively, the economist noted.
Photo: Global Look Press/Martin Schutt
According to him, there is another purely European problem associated with the high regulation of some markets. In particular, the utilities market in Europe is quite heavily regulated.
“It has already led to high-profile bankruptcies. Companies are facing a challenge: they buy gas at the market price, which has risen almost tenfold, and sell it at a regulated price, which has risen slightly. It should also be taken into account that in many European countries coalition governments are in power, that is, governments that are formed from representatives of different parties, sometimes with opposing political views. And this significantly complicates the adoption of tough decisions to combat inflation and the crisis,” Khestanov added.
According to the analyst, now the world economy is at a kind of fork in the road.
— If the world’s largest central banks begin to fight inflation hard (as they did in the US in 1981), the recession will be deep, but relatively short.. If the fight against inflation drags on and is weak (it seems that this is the main scenario), then there is a chance to repeat a rather unpleasant period in world economic history, namely the stagflation of the 1970s, which lasted almost a decade. At that time, energy prices were quite high, so if the stagflation of the 1970s repeats itself today, then energy prices will probably remain high for a long time, which is quite good for the Russian budget,” Sergey Khestanov concludes.
Recession instead of stagnation
In the first half of 2022, the European economy continued strong recovery growth, primarily due to the reopening of tourism after anti-COVID restrictionscommented Olga Belenkaya, Head of the Macroeconomic Analysis Department of FG Finam.
Photo: Izvestia / Kristina Kormilitsyna
— The surge in bankruptcy filings reflects the tensions associated with a spike in food, gas and electricity prices this summer as a result of the sanctions standoff with Russia and a sharp cut in supplies from Gazprom.: Since September, supplies via Nord Stream 1 have been completely stopped. The situation is complicated by record double-digit inflation and the rapid tightening of financial conditions as a result of the beginning of the normalization of the ECB’s previous ultra-soft policy, she stressed.
However, according to the expert, increase in the number of applications for bankruptcy in the EUwhich has been happening for the fifth month in a row, comes from very low levels. Large-scale stimulus measures by governments and central banks during the acute phase of the pandemic contributed to a sharp reduction in the number of bankruptcies.
“Even now, the number of filings for bankruptcy is about 10% below the level of 2015 and has only approached pre-pandemic values,” she continues. — There is a wave of registration of new businesses. So that the data itself is far from catastrophic enough to influence sanctions decisions. The European economy is not in recession yet — GDP growth in Q3 2022 amounted to 0.2% (QoQ) and 2.1% (YoY). But economic activity weakened in the third quarter and is likely to continue to weaken in the fourth quarter, with a fairly high probability of a transition to a recession at the end of this year and early 2023 for the entire region, or at least its largest economy, Germany.
The expert believes that now the acuteness of the EU gas problem has been removed due to the early formation of gas reserves in storage facilities and savings in consumption.
Photo: Getty Images/Chesnot
— However, in the event of a cold winter, there may be new price hikes, there will be a shortage of fuel, which will increase pressure on the industry.. From December 5, the EU introduces an oil embargo, according to European officials, this will block imports of up to 90% of Russian oil, and from February 5, an embargo on Russian oil products. Judging by the latest report from the International Energy Agency, this may lead to the fact that “competition for non-Russian diesel fuel (in Europe) will be fierce”, that is, the growth in the cost of energy resources may continue, the analyst clarifies.
Another factor is the gas shortage in the EU, which may develop in the second half of 2023.
— Pit will be necessary to refill the storage facilities, since, according to expert estimates, until 2025 the EU will not be able to completely replace the shortage of Russian gas with supplies from other sources in the required volumes, although work in this direction is very active. As the ECB admits, in the event of a complete cessation of Russian gas supplies (which is not yet available) and the impossibility of replacing them, the baseline scenario may not be economic stagnation, but recession, Olga Belenkaya sums up.
Pit for myself
Europe is about to fall into recession, no matter how stubborn politicians are in their assessments and slogans, says Ekaterina Kosareva, managing partner of the VMT Consult analytical agency.
– If we look at the structure of the business that most actively declares itself bankrupt, we will see that these are, first of all, housing and communal services enterprises. With a negative balance of income and expenses, it is impossible to do business, namely, the actions of federal and local authorities in the EU are pushing for this. Having made a popular decision to only slightly raise tariffs, the authorities set up housing and communal services enterprises, in fact, putting a financial burden on them: purchases are made at new, market rates, and sales are carried out at the same regulated rates, Kosareva notes.
Photo: Global Look Press/IMAGO/Ute Grabowsky/photothek.de
That is, for the consumer, unlike companies, there should not be a tangible difference at first glance. Organizations are either already facing negative balance sheets or are about to. Many people prefer not to get into unpromising debts and start bankruptcy proceedings. According to the interlocutor of Izvestia, the risks are calculated by both catering enterprises and manufacturing enterprises, the cost of products of which depends on both energy carriers and raw materials from Russia.
It is worth remembering that winter is just beginning. European authorities are hoping with all their might for a warm winter and a sense of solidarity among their citizens. Nevertheless, EU citizens have already felt the shortage of certain foodstuffs, and the rise in food prices, and the rise in the cost of utility bills, and the inability to travel long distances due to very expensive gasoline. In our opinion, we should expect some mitigation of anti-Russian sanctions already in January.— concludes Ekaterina Kosareva.
The EU artificially created a “perfect storm” for the collapse of industry and the economysays Artem Tuzov, Executive Director of the Capital Market Department of IC IVA Partners.
— The main factors are: the rejection of cheap resources from the Russian Federation, the rejection of trade with the Russian Federation and the growth of general inflation over 10%, the growth of industrial and energy inflation – up to 40%. The ECB was the last to react to the situation and did not raise the refinancing rate for a long time. As a result, the increase is now sharp – 0% in the middle of the year, rising to 2% in October 2022. And in order to overcome inflation of 10%, you will have to raise the rate to 8% or more. The spread between the ECB and the Fed reached 2%the analyst explains.
Photo: Getty Images/NurPhoto
Thus, the expert notes, big capital is stimulated to withdraw funds from the EU to the US, receiving a double premium for this at the risk-free rate.
“Meanwhile, it is still completely unclear how the EU will deal with this situation. It seems that those concerned have chosen the EU as a victim of the crisis. And under the cries of bad Russia, the EU is being destroyed, – Artem Tuzov shares his opinion.