Home Finance Eurozone Recession Narrowly Avoided, But Pressures Remain on the Economy

Eurozone Recession Narrowly Avoided, But Pressures Remain on the Economy

by internationalbanker

By Monica Johnson, International Banker


According to Eurostat figures, the eurozone’s gross domestic product (GDP) for last year’s final quarter was unchanged from its third quarter (Q3). With a 0-percent quarterly growth rate, the currency union of European Union (EU) member states managed to narrowly avoid entering the recession that had been widely forewarned in the days and weeks beforehand. However, as many analysts have observed, with interest rates and energy prices currently elevated and expected to remain so over the coming months, the eurozone economy will have a major battle to return to normalcy. 

“In the fourth quarter of 2023, seasonally adjusted GDP remained stable in both the euro area and the EU, compared with the previous quarter,” Eurostat, the statistical office of the EU, revealed in a preliminary flash reading on January 30. “In the third quarter of 2023, GDP had declined by 0.1% in both zones.” A first estimation of annual growth also found that GDP for 2023 had increased by 0.5 percent in both the euro area and the EU.

As for fourth-quarter (Q4) GDP growth for individual member states, Portugal came out on top at 0.8 percent compared with the previous quarter, followed by Spain at 0.6 percent and Belgium and Latvia at 0.4 percent each. Indeed, Southern European economies were key performers on the whole in helping the eurozone avoid a technical recession, defined as two consecutive quarters of negative quarterly growth, with Spain and Italy also registering positive growth rates of 0.6 percent and 0.2 percent, respectively.

At the opposite end of the scale, Ireland (-0.7 percent), Germany and Lithuania (-0.3 percent each) weighed in at the bottom. Indeed, as the eurozone’s biggest economy, Germany remains a significant source of the bloc’s prolonged underperformance. Thanks to a late upward revision of its Q3 figure, the country narrowly dodged a technical recession but continues to battle in the face of weak demand for its increasingly uncompetitively priced exports, as well as a shrinking industrial sector suffering from surging energy costs. The region’s second-largest economy, France, meanwhile, saw its GDP unchanged, while year-on-year growth rates were positive for six countries in the group and negative for five, Eurostat also reported.

As has been the case for much of the world, the eurozone has felt the agony of sharply rising interest rates over the last 18 months, with the European Central Bank (ECB) battling to bring down inflation from its October 2022 peak of 10.2 percent to 2.8 percent in January 2024. Nonetheless, with interest rates still at record-high levels under the ECB’s steadfast commitment to lowering inflation to its 2-percent target, the eurozone economy is set to remain in a precarious position throughout much of the first half of the year. And while recession territory may have been skirted, pressure remains on the eurozone to achieve meaningful growth under the weight of persistently high interest rates, increased borrowing costs and elevated energy prices that continue to inflict painful costs on European citizens and businesses.

Any celebration of the eurozone’s overall economic position at this stage seems premature. “This does not really change the picture. The massive tightening of monetary policy brought economic growth to a standstill in the summer,” Christoph Weil, a senior economist at Commerzbank, wrote in a recent note reflecting on the Q4 figures. “It is unlikely that the economy will emerge from this weak phase before the spring.” Weil also observed that “persistently high inflation” will likely prevent the European Central Bank from lowering interest rates before the summer, and the positive economic impacts of those cuts will not be meaningfully transmitted to the eurozone economy before 2025. UBS Global Wealth Management’s global chief economist, Paul Donovan, also decried anyone “babbling on with ghoulish glee about two quarters of negative growth” as not helpful. “The difference between -0.1 percent growth and zero percent growth is pretty meaningless in living standard terms, or what the policy response should be.”

And with US GDP growing at a hefty 4.9 percent during Q4, the eurozone’s tepid performance over the same quarter means it is becoming much less economically aligned with its American counterpart. “In the eurozone, consumption is suffering much more from the high inflation spike because wage growth has been slow to adjust due to more negotiated wage-setting. That has resulted in a larger decline in real wages,” ING’s senior economist, Bert Colijn, wrote on January 30. “And energy competitiveness has suffered from the energy crisis in the eurozone, resulting in a big difference in industrial performance. Furthermore, while eurozone budget deficits are still sizable, fiscal support is much smaller than in the US.”

According to Nicola Mai, economist and portfolio manager at asset management firm PIMCO (Pacific Investment Management Company LLC), Europe “is still recovering from a lingering energy shock and has not experienced the same degree of fiscal stimulus as the more resilient US economy in recent years”. Speaking to The Guardian, Mai also noted that the eurozone’s shorter debt maturities “also mean that interest rate hikes have been felt more quickly.” As such, Mai predicted that the fragility that characterised the eurozone economy through much of last year “will persist in 2024”.

That weakness may be further compounded this year by stubborn wage growth, with the ECB potentially concerned about workers’ demands for pay rises becoming more frequent and more substantial to cope with the cost-of-living crisis. Although wages in the EU did not rise as prodigiously as they did in the United States and the United Kingdom at the start of the inflation crisis, the third quarter of 2023 showed annual growth at a record high of 4.7 percent—more than the 4.1 percent reported in the US but lower than the 6.5 percent in the UK—while wage growth of 5.3 percent was recorded for 2023 overall. Although this rate is expected to cool to 4.4 percent in 2024—after an ECB survey of 70 non-financial companies found that “an increasing number” are planning to cut jobs this year—the central bank is aiming for a maximum annual wage growth of 3 percent to align with its overall 2-percent inflation target.

Rates may remain “higher for longer” to address a potentially overheating labour market in the eurozone. And with the price of borrowing already sitting at record levels, Europeans will continue to face excruciating living costs for the time being, while a stable growth rate for the economy remains elusive. “The region dodged a technical recession. This is just semantics, though. The big picture is that eurozone GDP has been flat since Q3 2022 when gas prices surged, and the ECB started raising interest rates,” Jack Allen-Reynolds, a eurozone economist at Capital Economics, recently wrote, adding that the eurozone economy will “flatline” during the first half of 2024 “as the effects of past monetary tightening continue to feed through and fiscal policy becomes more restrictive”.

Will there be any relief for the economy in the immediate future? Member states will be enthused by a handful of economic bright spots that will continue to shine this year. “Survey indicators show signs of bottoming out, and real wage growth is slowly starting to recover; the latter should put more money in consumers’ pockets. Over the course of the year, that effect should become bigger,” ING’s Colijn observed. “And financial conditions are easing, which is resulting in some bottoming out of lending indicators. That helps investment later in the year.” That said, the Dutch bank is not anticipating any material improvement in GDP growth during the first quarter of 2024 but rather “much later in the year”.

According to consensus figures from a Financial Times (FT) survey of 48 economists in December, the eurozone economy will grow by just over 0.6 percent this year, which is less than the ECB’s and International Monetary Fund’s (IMF’s) projections of 0.8 percent and 1.2 percent, respectively. Vítor Constâncio, former ECB vice president and one of the economists polled by the FT, cited a “recession in Germany or Italy and a Trump victory” as the main risks to the eurozone economy this year.

“If the US abandons Ukraine and threatens the EU with a trade war, Europe and the world would suffer more than the US,” Holger Schmieding, chief economist at Berenberg Bank, also contended, adding that a Trump election victory was the main threat to Europe’s economic outlook. Mahmood Pradhan, Amundi Investment Institute’s head of global macroeconomics, meanwhile, identified the biggest risk for the eurozone as a “prolonged restrictive stance of monetary policy—including a faster pace of balance-sheet unwinding—and less supportive fiscal policy, especially in Germany”.


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