The eurozone economy stagnated late last year as a prolonged energy crisis made some European industries less competitive and consumers cut back on spending to cope with high living costs, the European Statistics Office reported on Tuesday. .
But economists believe the worst may be over as the European Central Bank continues its efforts to rein in inflation without sending the euro zone economy into a deep downturn.
After contracting in the third quarter, economic output in the 20 countries using the euro currency grew by zero percent quarter-on-quarter in the last three months of 2023, narrowly avoiding recession. Compared to the previous year, the euro area's growth rate was just 0.1%.
The pace of anemia leaves Europe far behind the United States. In the United States, the economy has slowed from its phenomenal pace of growth but is still supported by consumer spending. Aggressive interest rate hikes by the Fed have slowed inflation, and the Fed is expected to begin unwinding rate hikes soon.
“The gap between economic activity in the U.S. and the eurozone has widened significantly at the moment,” said Bart Koline, chief eurozone economist at ING Bank. “A significant improvement in the euro area economy is not expected until the second half of this year.”
He said that what was holding Europe back was structural changes since the Ukraine war and a decline in competitiveness against the backdrop of the energy crisis. The problem is most pronounced in Germany. Germany's manufacturing industry is in decline, turning Europe's largest economy into a regional albatross. Economists say the country is unlikely to emerge from recession any time soon.
European companies are raising wages, but at a slow pace and consumers continue to save rather than spend. While soaring prices for everything from bread to gas have subsided, it's still not enough to completely alleviate the financial pain of households, and rising wages are increasing costs for manufacturers.
The International Monetary Fund said in its latest economic outlook on Tuesday, reflecting “weak consumer confidence, the lingering effects of high energy prices, and weakness in interest rate-sensitive manufacturing and business investment.” He said European growth was “significantly constrained.” It predicted that the eurozone's growth rate would be only 0.9% this year.
This highlights the challenges facing ECB policymakers. The ECB, like the Fed, had been gradually raising interest rates to curb price increases until recently suspending policy. There are signs that the ECB's tactics are working, not pushing the economy off the cliff as economists had feared, but rather paving the way for a gradual recovery. Investors expect the central bank to start cutting interest rates as early as April, which could spur more economic activity.
Rory Fennessy, European economist at Oxford Economics in London, said that although the recovery will be slow, “we expect headwinds in Europe to subside and support a recovery in growth throughout 2024.”
The strength of the backlash could largely depend on Germany's fate. Carsten Brzeski, global head of macroeconomics at ING, said Germany's economy had been flat for the past two quarters, but shrank by 0.3% in the fourth quarter, leaving it in the “twilight zone between recession and stagnation.” He said he stayed at.
France, the region's second-largest economy, failed to achieve economic growth in the fourth quarter as consumption fell and investment slowed. The government has raised the minimum wage eight times since 2021 to help workers deal with the cost of living crisis, but many still feel they are lagging behind. Angry farmers locked down the country last week, airing their frustrations over low wages and declining livelihoods brought on by inflation.
Growth was stronger in key countries along Europe's southern rim, including Spain and Portugal, making it clear that European economies increasingly appear to be operating at two speeds. Spain's economy grew 0.6% year-on-year in the fourth quarter, driven by a tourism boom, while Portugal's economy grew 0.8%.
Economists see further signs of a potential recovery in the coming months. The prospect of a potential interest rate cut by the ECB could spur lending to manufacturing, stimulate further business investment and encourage a gradual revival of Europe's real estate market, which slowed sharply last year.
And while wages are only just beginning to recover, the prospect of further price declines could mean consumers start spending more, allowing more money to flow into the economy and boosting growth.
“A soft landing for the European economy remains the most likely scenario in the short term,” S&P Global Ratings said in a recent research note.
