London
CNN
—
Official data showed on Tuesday that the European economy narrowly avoided ending 2023 in recession.
According to an initial estimate published by Eurostat, the gross domestic product of the 20 countries that use the euro stagnated in the October-December quarter compared to the previous three months. In the July to September quarter, GDP fell by 0.1%.
The overall economy of the European Union, which includes 27 member states, also managed to avoid a recession, typically defined as two consecutive quarters of economic contraction.
According to the data, GDP increased by 0.5% in both the euro zone and the EU for the whole of 2023.
The European economy has struggled to regain momentum after the pandemic, crippled by high inflation and rapid interest rate hikes to combat it. A surge in energy prices in 2022 – triggered by Russia's full-scale invasion of Ukraine earlier this year – was particularly painful and natural gas prices in Europe remain high.
Europe's largest economy is weakening: Germany's production shrank last year for the first time since the start of the pandemic. German GDP fell by 0.3 percent in the fourth quarter compared to the previous quarter, the country's statistics office confirmed on Tuesday.
Better-than-expected growth in Italy and Spain in the final three months of 2023 – where output rose 0.2% and 0.6% respectively – appears to have helped keep the European economy stable late last year.
The French economy, Europe's second-largest economy, stagnated in the fourth quarter but grew 0.7% for full-year 2023.
Overall, Tuesday's euro zone data is “no reason to celebrate,” says Christoph Weil, senior economist at Commerzbank.
“That doesn’t really change the picture. “The massive tightening of monetary policy brought economic growth to a standstill in the summer,” he wrote in a statement. “It is unlikely that the economy will emerge from this weak phase before the spring.”
“Persistently high inflation” makes it unlikely that the European Central Bank (ECB) will cut its key interest rates before the summer, he added, noting that the positive economic impact of these cuts is unlikely to be felt until 2025.
Higher official borrowing costs increase the cost of capital, which tends to curb borrowing by households and businesses and slow overall spending in the economy.
Jack Allen-Reynolds, euro zone economist at Capital Economics, has a similarly bleak view of Europe's prospects.
“The region has escaped a technical recession. However, this is just semantics. “The overall picture is that eurozone GDP has been stagnant since the third quarter of 2022, when gas prices rose and the ECB began raising interest rates,” he wrote in a note.
He expects the eurozone economy to “flatten out” in the first half of 2024 “as the effects of past monetary policy tightenings continue to be felt and fiscal policy becomes more restrictive.”
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