The euro zone economy narrowly avoided a technical recession in the second half of 2023, but stagnated in the last three months of the year, official data showed on Tuesday.
The single currency area's economy has been hit by a number of factors, including rising interest rates, a cost-of-living crisis that has hit household spending, and weak global demand.
Southern European countries helped the region avoid recession, which was caused by the dismal performance of continental power Germany.
The 0% change from the previous quarter in the October-December period was better than expected.
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Analysts at Bloomberg and financial data firm FactSet had expected a 0.1% contraction in the fourth quarter.
If the forecast is correct, it would mean two consecutive quarters of negative growth, the standard for a technical recession.
The EU's Eurostat data agency also recorded no growth in the 27-nation bloc, which includes member states that do not use the euro, between October and December after contracting by 0.1% in the third quarter.
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Economists predict that economic stagnation will continue.
“We think the first half of this year will be flat as the effects of past monetary tightening continue and fiscal policy becomes more restrained,” said Jack Allen Reynolds of Capital Economics, an economic research firm.
He added that it was “simply semantics” that the eurozone was avoiding a technological recession.
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“The big picture is that eurozone GDP has been flat since the third quarter of 2022, when gas prices soared and the ECB (European Central Bank) started raising interest rates,” he said.
Energy prices soared after Moscow's invasion of Ukraine and as Europe, long dependent on Russia, scrambled to turn to other energy sources.
Germany's lackluster performance comes as its key manufacturing sector is suffering from soaring electricity costs, and slowing demand from major export destinations such as China is making the situation worse.
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The German economy shrank by 0.3% in the final quarter of 2023, according to Eurostat.
Modest consumption and turmoil over government budgets are also hurting Germany.
German Finance Minister Christian Lindner dismissed the notion that his country was Europe's “sick man” at a World Economic Forum event earlier this month, insisting that Germany “has had a short night and is tired.”
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The International Monetary Fund (IMF) highlighted on Tuesday that “growth in the euro area has slowed significantly,” with Germany once again the slowest-growing G7 economy with just 0.5% growth this year. He pointed out that there is a possibility that
France, the EU's second-largest economy, and Italy, the third-largest economy, are expected to grow by 1.0% and 0.7%, respectively, this year, according to the IMF.
Southern countries such as Portugal and Spain led the eurozone as a whole, which outperformed expectations.
Portugal and Spain recorded growth of 0.8% and 0.6% respectively in the last quarter, while Italy's growth rate was only 0.2% in the same period.
France recorded zero growth in the last two quarters of 2023.
Ireland's economy recorded its biggest negative growth over the period, contracting by 0.7%.
Economists said the gap between the eurozone's economic performance and that of the United States was widening.
ING's Bert Collin said: “The divergence with the United States is getting even wider. In the euro area, where wage increases have been slow to adjust due to more negotiated wage settings, consumption has been further weakened by the surge in high inflation. “It's been a big blow.”
The IMF forecasts that the US economy will grow by 2.1% in 2024, compared to 0.9% in the euro area.
There are hopes in Europe that the ECB will start cutting interest rates by mid-year, but Lagarde said last week that it was too early to discuss such a move.
Eurostat will release January inflation data on Thursday, after the annual rate reached 2.9% in December. This remains above the ECB's target of 2%.
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