Michelle ThompsonEurope narrowly avoided entering a recession at the end of 2023, according to official data released on Tuesday. The gross domestic product (GDP) of the 20 countries that use the euro remained stagnant in the October-to-December quarter compared to the previous three months, following a slight dip of 0.1% in the GDP during the July-to-September quarter.
The broader European Union (EU) economy, encompassing 27 member states, also managed to avoid a recession, which is typically defined as two consecutive quarters of economic contraction.
For the entirety of 2023, both the eurozone and the EU saw a 0.5% increase in GDP, as indicated by the data.
Europe’s economy has faced challenges in regaining momentum since the COVID-19 pandemic, with high inflation and rapid interest rate hikes being significant factors. The surge in energy prices in 2022, triggered by Russia’s invasion of Ukraine, added to these difficulties, and natural gas prices remain elevated in Europe.
Germany, the largest economy in Europe, experienced a contraction in output for the first time since the onset of the pandemic in 2023. In the fourth quarter, German GDP decreased by 0.3% compared to the previous quarter.
Italy and Spain, on the other hand, performed better than expected in the last three months of 2023, with their respective outputs expanding by 0.2% and 0.6%. These positive growth figures likely contributed to stabilizing Europe’s economy at the close of the year. France, the second-largest economy in Europe, had stagnant growth in the fourth quarter but saw a 0.7% expansion over the entirety of 2023.
There is no cause for celebration.
The recent eurozone data provides “no reason to celebrate,” as stated by Christoph Weil, a senior economist at Commerzbank. He points out that this data doesn’t change the overall outlook, emphasizing that the substantial tightening of monetary policy halted economic growth during the summer. He believes it’s unlikely that the economy will recover from this weak phase before spring.
Weil also mentions that due to “persistently high inflation,” it’s improbable that the European Central Bank (ECB) will lower its key interest rates before summer. He notes that any positive economic effects from such rate cuts are unlikely to be felt until 2025. Elevated borrowing costs can raise the cost of capital, which tends to discourage borrowing by households and businesses, leading to reduced overall spending in the economy.
Jack Allen-Reynolds, a eurozone economist at Capital Economics, shares a similarly pessimistic perspective on Europe’s prospects. He views the avoidance of a technical recession as a mere matter of semantics. His assessment is that eurozone GDP has remained stagnant since Q3 2022, coinciding with the surge in gas prices and the ECB’s initiation of interest rate hikes.
Allen-Reynolds anticipates that the eurozone economy will “flatline” during the first half of 2024, citing the continued impact of past monetary tightening and a more restrictive fiscal policy as contributing factors.
