Eurozone dips into recession

At the beginning of this year, the eurozone economy entered a recession as the decline in German and other large economies impacted the output.

Eurostat, Eurozone’s statistical agency, has released official data showing that the growth in the 20 country zone in the first quarter of 2023 contracted by 0.1%. This is a downward revision of the initial estimate, which had been a growth of 0.1 percent. This revision is in line with private sector forecasts.

This is the second consecutive contraction quarter, which meets the definition of technical recession. Economists believe that this will be a mild recession given the strength of the job market.

Eurostat reported that the activity in the area of the single currency was affected by a reduction in consumer spending in the first three months, as households struggled to cope with rising inflation and energy costs.

The growth of the EU was also slowed by a decline in government spending and imports.

Ireland had the worst performance in the European Union, with a first quarter production falling by 4.6% at the beginning of the year. Ireland’s growth figures have fluctuated in recent years. Large revisions have distorted the eurozone’s overall performance.

Germany has entered recession following a growth contraction of 0.3 percent. Luxembourg and Portugal had the best-performing economies, with quarterly growth rates of 2 percent and 1,6 percent respectively.

The Netherlands, Hungary, and the Baltics saw a decline in growth. The UK’s economy grew by 0.1% in the first three months.

The sharp increase in gas prices following Russia’s invasion Ukraine has hit Europe particularly hard. In the region, headline inflation peaked last year at 10.6 percent. This strained household spending. The inflation rate has started to decline, but underlying pressures on prices show that food and goods remain high.

Next week, the European Central Bank will likely raise interest rates another quarter percentage point to combat inflationary pressures. However, this will put further pressure on a slowing economy.

Andrew Kenningham is the chief European economist of Capital Economics. He said that rising interest rates will lead to a further decline in growth over the next few months. Kenningham said that the eurozone’s economy had been stagnant for the past two years. He added, “We think the GDP will contract again in the next quarter as the effects from monetary policy tightening continues to filter through.”

Claus Vistesen is the chief economist for the eurozone at Pantheon Macroeconomics. He said the consumer demand would likely remain low for the majority of the year, and that this could encourage doves to ask for no further rate increases after the month.

Vistesen stated that “our forecasts indicate that the growth rate in the eurozone is expected to be zero in both the second and third quarterly quarters.”

Eurostat released separate figures showing that employment rates rose by 0.6%, further proving that the labour markets are stable. The unemployment rate in the EU has fallen to record lows.

Last month, the European Commission predicted that the growth rate for the entire single currency area would be 1.1%. Inflation is expected to fall to 6.1% last month, down from 7.1% in April.