Why the energy shock hasn't been so bad for Europe this time

When energy prices spiked as the Iran war began, thoughts across Europe immediately went back to the shock that hit the continent when Russia invaded Ukraine and the economic consequences that followed.

But Europe seems to be more resilient this time around, and according to Capital Economics' group chief economist Neil Shearing, there are several reasons for that.

"The first is that the size of the terms of trade shock has been smaller than many feared. The increase in global energy prices has been more modest than in 2022, particularly for natural gas," he said in a note.

Europe is now also less dependent on fossil fuels, Shearing added - renewables have become more important, and energy efficiency has improved.

"As a result, the euro-zone’s imports of oil by volume have fallen by about 10% compared with 2022, while imports of natural gas have fallen by close to 15%."

"The net effect of all this is that the drag on activity from higher energy prices has been smaller than many assumed," Shearing said.

He also pointed to more supportive fiscal policies helping cushion the impact on activity, while households have reduced savings rates this year - which in turn has helped ease the impact of higher energy prices on consumer spending.

There is also "some evidence that manufacturers brought forward production in the second quarter to get ahead of perceived increases in energy costs further down the road," Shearing added, noting that European industry more broadly has also been resilient.