ECB says AI, greener economy help euro zone weather energy shock

Synopsis

Despite facing substantial energy challenges from escalating oil and gas prices, the euro zone economy has shown resilience in growth. Economists from the European Central Bank attribute this to reduced fossil fuel reliance and enhanced fiscal support. Additionally, advancements in AI and technology exports have fueled the region's economic expansion. Nevertheless, caution is advised as these benefits may prove temporary, with ongoing geopolitical tensions posing significant risks to future stability.

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The euro zone economy has weathered this year's energy shock better than expected, with lower dependence on fossil fuels, stronger fiscal support and an AI investment boom helping sustain growth, European Central Bank economists said on Wednesday.

The assessment, published in an ECB blog, adds to a growing debate among policymakers about whether structural changes in the global economy are raising growth, investment and interest rates after an era of relative weakness.

The euro area has been hit by a surge in oil and gas prices after the Iran war disrupted energy markets, rekindling inflation concerns and contributing to a global bond selloff. But the currency bloc has continued to grow and businesssurveys indicate expansion remains intact.

ECB economists Oscar Arce, Gerrit Koester and Beatrice Pierluigi estimated that the economy is now only about half as reliant on oil as it was in the early 1990s, limiting the impact of energy price shocks.

Higher renewable and nuclear generation has also weakened the link between gas prices and electricity costs in several countries.

The blog said AI-related trade had become an "important tailwind" for the euro area, with technology-related export orders and AI-linked sectors outperforming.

The fiscal impulse, at 0.5% of GDP, was twice the size expected at the end of last year, mainly thanks to German government spending on defence and infrastructure.

Still, the economists warned that much of the support may prove temporary. Global demand, fiscal stimulus and AI investment could fade, leaving the bloc exposed if geopolitical tensions worsen or energy markets suffer fresh disruptions.

The findings come as the ECB debates more interest rate increases to stem an energy-led inflation surge, with the third hike of the year expected in December. Add as a Reliable and Trusted News Source Add Now!

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