Summer tourism revives eurozone economy, but cost-of-living crisis casts a shadow

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

The hotel, which charges an average of 1,800 euros per night this summer, noticed a rise in April and is fully booked until mid-October. “For two years no one could come,” said co-owner Vito Cinque. “Now everyone does it.”

A tourism boom in the eurozone, fueled by the depreciation of the single currency against the dollar, is a bright spot in a region that economists fear will fall into recession in the second half of this year.

Figures on Friday showed currency zones the economy grew by 0.7% between the first and second quarters, a stronger than economists’ forecast of 0.1%, and a sharp contrast to US gross domestic product figures for the same period, which showed the world’s largest economy. shrink, shrink second quarter in a row.

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

Mohamed Ichem, who sells macaroons at Ladurée near Paris’s Tuileries Gardens, says most of his customers speak English. “Tourists spend money without counting,” Icham said. “My biggest order is eight boxes of 54 pieces worth more than 1,000 euros.”

Adama Touré, manager of Le Castiglione, a short walk from the Ritz in the French capital’s chic Place Vendôme, said: “Americans enjoy life in every way. . . I just served them a plate of caviar.”

Ignacio de la Torre, chief economist at asset management firm Arcano, estimated that about a third of Spain’s growth in the second quarter, which was 1.1% compared to 0.2% in the first three months of the year, was driven by tourism. .

María Frontera, president of an association of hotel owners on the Spanish resort 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 in August, and fall demand continues to pick up,” she said.

But by the time the weather cools down, European businesses and consumers will face even more economic pressure. The war in Ukraine has left factories in the region, barely recovering from the pandemic, facing new supply chain challenges. The heavily manufacturing-reliant German economy stagnated in the second quarter, defying analysts’ expectations of modest growth and highlighting how dire the situation is for northern economies that may rely less on hospitality.

The Russian invasion and doubts about Moscow’s willingness to continue supplying gas to Europe have triggered a spike in household energy prices, which have risen by 40% in the past 12 months, while food prices have risen by 10% over the same period. leading to the worst cost-of-living crisis in decades.

Marina Lalli, president of Italy’s National Federation of the Travel and Tourism Industry, said resorts catering to simpler Italian families are under pressure. “People are struggling to pay utility bills, car fuel and food prices have also risen. [Italians] decide either not to go on vacation at all, or to stay not for 10 days, but for a week, or even three.

Confidence data released last week by Eurostat, the European Commission’s statistical office, shows consumers are more reluctant to make large purchases than at any time since the early months of the pandemic.

This pessimism is unlikely to stop the European Central Bank from raising rates further in the fall, following their first hike in decades, when they raised their base deposit rate by 50 basis points to zero in late July.

“We expect the ECB to raise [the rate] another 100 basis points at the end of the year to help prevent a rise in inflation expectations as inflation rises even more in the coming months,” said Holger Schmieding, an economist at Berenberg Bank.

Overall, inflation in the eurozone rose to a new record high of 8.9% year-on-year through July, according to data released on Friday by Eurostat, the European Commission’s statistical office. Even the main measure, which rules out increases in food and energy prices, rose by 4%, more than double the ECB’s target of 2%.

If interest rates rise and tourists return home, economists expect growth numbers to worsen, especially if tensions with Moscow escalate. Russian energy company Gazprom cut streams through its Nord Stream 1 gas pipeline, which runs under the Baltic Sea to Europe’s largest economy, only up to 20 percent of capacity – levels that, if they persist, will trigger a sharp recession in Europe.

“This quarter brings good news but tells us little about the state of the economy,” said Gilles Moek, chief economist at French insurance company Axa. “What will happen after the end of the summer?”