As a result of consumers cutting back on spending to deal with rising living expenses and a persistent energy crisis that made some European industries less competitive, the eurozone economy stagnated in the latter part of last year, according to a report released on Tuesday by Europe’s statistics agency.
However, as long as the European Central Bank keeps up its efforts to contain inflation without sending the eurozone economy into a severe recession, analysts think the worst may be behind us.
After shrinking in the third quarter and just barely avoiding a recession, the 20 countries that use the euro currency saw zero percent growth in their GDP in the last three months of 2023 compared to the previous quarter. In the past year, the eurozone experienced a meagre 0.1% growth.
The sluggish pace is causing Europe to lag significantly behind the US, where consumer spending continues to drive the economy despite a slowdown from its previous rapid growth rate. The Federal Reserve’s aggressive hikes in interest rates have caused inflation to slow down, and the Fed is anticipated to start reducing those increases shortly.
According to Bert Colijn, chief eurozone economist at ING Bank, “the gap in economic activity between the U.S. and eurozone is widening significantly at the moment.” “Much later in the year, we only anticipate a material improvement in the eurozone economy.”
According to him, structural changes brought about by the conflict in Ukraine and the energy crisis are what are dragging Europe down in terms of competitiveness. The issue is particularly acute in Germany, where the region’s largest economy—Germany—has become an albatross due to the collapse of its once-dominant manufacturing sector. Economists predict that the nation is unlikely to recover from the depression very soon.
Although salaries have been rising slowly in Europe, this has caused consumers to save money rather than spend it. While the rapid rise in prices for everything from bread to gas has cooled, it’s not yet enough to fully reduce the pain for households, while wage increases have added to manufacturers’ costs.
The International Monetary Fund noted “notably subdued” growth in Europe in its most recent economic outlook, which was made public on Tuesday. The organisation attributed this to “weak consumer sentiment, the lingering effects of high energy prices, and weakness in interest-rate-sensitive manufacturing and business investment.” It predicted that this year’s eurozone growth would only increase by 0.9 percent.
This has increased the difficulties faced by E.C.B. policymakers, who, like the Fed, have raised interest rates in an attempt to slow the rate of price increases before recently halting their campaign. There are indications that the E.C.B.’s strategies are beginning to clear the path for a modest recovery rather than driving the economy into irreversibility as economists had predicted. Investors anticipate that the central bank will begin reducing interest rates as early as April, a move that may spur additional economic growth.
Although any rebound would be modest, Rory Fennessy, Europe economist at Oxford Economics in London, stated that “we anticipate fading headwinds in Europe to support a recovery in growth throughout 2024.”
The strength of any comeback may depend greatly on Germany’s fortunes. Carsten Brzeski, head of global head of macroeconomics at ING, claimed that the German economy declined by 0.3 percent in the fourth quarter, continuing to remain in a “twilight zone between recession and stagnation” following two quarters of flatlining growth.
The second-biggest economy in the bloc, France, saw a decline in consumption and a halt in investment in the fourth quarter, hindering its growth. In an effort to aid workers facing a cost-of-living crisis, the government has raised the minimum wage eight times since 2021, but many still feel they are falling behind. Over the past week, angry farmers have blockaded the nation, partly as a way to vent their frustrations about poor pay and dwindling living standards driven on by inflation.
Major nations bordering Europe’s southern hemisphere, such as Spain and Portugal, have seen stronger growth, suggesting that the continent’s economy is increasingly moving at two different speeds. Due to a surge in tourism, Spain’s economy grew by 0.6 percent in the fourth quarter compared to the same period last year, while Portugal’s grew by 0.8 percent.
More indications of a possible recovery are anticipated by economists in the upcoming months. A mild rebound in the European real estate markets, which experienced a significant slowdown in the previous year, as well as the possibility of an interest rate cut by the European Central Bank could encourage lending to the manufacturing sector and encourage more business investment.
Even though wages have only recently begun to rise, the possibility of further price reductions may encourage consumers to start spending more, which would increase the amount of money going into the economy and spur growth.
“A soft landing of the European economy remains the most likely scenario over the near term,” S&P Global ratings said in a recent research note.