The Eurozone economy managed to avoid a recession by a hair’s breadth, posting a meagre 0.1% growth in the first quarter of 2023, despite ongoing headwinds from the conflict in Ukraine, higher energy prices and tighter monetary policy from the European Central Bank (ECB). The data, released by Eurostat, the European Union’s statistical agency, revealed that the bloc’s largest economy, Germany, stagnated in the first quarter, following a contraction of 0.5% in Q4 2022. Meanwhile, Italy and Spain, the third and fourth-largest eurozone economies, exceeded market expectations, posting quarterly growth of 0.5% each, while France grew by 0.2%. The Eurozone’s ability to stave off a severe downturn in the face of such challenges surprised economists, who had predicted a recession this time last year.
The resilience of the Eurozone economy can be attributed to a combination of factors, including the warmer winter weather, lower wholesale energy prices, fiscal stimulus and China’s reopening. However, growth prospects are likely to remain weak due to the ECB’s determination to combat strong underlying inflationary pressures with higher interest rates. Andrew Kenningham, Chief Europe Economist at Capital Economics, noted that the small increase in GDP in Q1 2023 had avoided a technical recession “by a whisker,” adding that “the economy has essentially stalled as domestic demand has been hit hard by the energy shock followed by monetary tightening. We think activity will remain weak in the coming quarters.”
The Eurozone economy has been flatlining for the past six months, with Q1 2023’s growth of 0.1% following a flat picture in the final three months of 2022, which reduced the year-on-year increase in output from 1.8% to 1.3%. Despite the sluggish performance, the Eurozone’s resilience in the face of mounting challenges is a testament to the bloc’s economic fundamentals, which have proved to be more robust than expected. Carsten Brzeski, Global Head of Macro at ING Bank, remarked that the Eurozone economy had avoided a severe recession that was predicted a few months ago, thanks to several factors that have aided its recovery.
Brzeski explained that “the warmer winter weather, lower wholesale energy prices, the reopening of China and fiscal stimulus are the key drivers behind this better-than-expected performance.” Nevertheless, the ECB remains concerned about core inflation, which excludes food and energy, and is expected to raise rates by 0.25 percentage points at its upcoming meeting next week. While annual inflation rates in the Eurozone fell sharply in March, from 8.5% to 6.9%, core inflation rose from 5.6% to a new record high of 5.7%, prompting the ECB to tighten policy further.
Despite the challenges facing the Eurozone, some of the bloc’s economies have managed to outperform expectations in Q1 2023. Spain and Italy, in particular, posted better-than-expected growth figures, with the latter exceeding market expectations. Spain’s economy, which is heavily dependent on the services sector, has benefited from the recovery of tourism, as well as strong consumer spending, which has driven economic activity in the country. Meanwhile, Italy’s economy, which has been plagued by structural problems for years, appears to be benefiting from structural reforms and targeted fiscal stimulus, which has supported domestic demand.
Although there are some positive signs of growth in the eurozone economy, it remains a fragile recovery that could easily be disrupted by external factors such as geopolitical tensions, energy prices, and supply chain disruptions. The ECB will continue to play a crucial role in supporting the eurozone economy through its monetary policy and fiscal stimulus measures. However, policymakers will need to navigate carefully the delicate balance between combatting inflationary pressures and preventing a slowdown in growth.