While global investors are fixated on the prospects for the U.S. and China, they should not lose sight of the euro-zone where the economic outlook has shifted this year. The consensus view at the start was that Europe would be adversely impacted by its heavy reliance on Russian natural gas. Instead, the euro-zone economy proved resilient initially primarily because prices for natural gas and crude oil plummeted unexpectedly.
More recently, however, euro-zone activity has softened. German’s economy, which accounts for one quarter of euro-zone GDP, was flat in the second quarter, and the Kiel Institute recently revised its forecast for this year to minus 0.5 percent. This mainly reflects declines in industrial output and construction activity and soft consumer spending. According to the IMF, Germany will be the only major economy to shrink this year.
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