The European economy held up better than expected to the war in Ukraine last year, escaping a recession in the last quarter, but soaring prices continue to dampen growth, which looks set to be very weak in 2023.
Defying forecasts, the gross domestic product (GDP) of the euro zone continued to progress over the last three months of 2022, despite a marked slowdown. Growth reached 0.1% compared to the previous quarter, Eurostat announced on Tuesday.
“Good news: the euro zone has avoided a contraction,” rejoiced the European Commissioner for the Economy, Paolo Gentiloni, who still predicted a recession for this winter in November.
“We continue to face multiple challenges”, but the outlook for 2023 “looks a little more positive today than in the fall”, he stressed.
Growth marked a marked slowdown at the end of the year, after reaching 0.3% in the third quarter and 0.9% in the second, but analysts were expecting a slightly negative figure for the 20 countries sharing the single currency.
Decline in purchasing power
European economic activity bent but did not break in the face of the headwinds triggered by the war in Ukraine, in particular the rise in energy prices which reduced the purchasing power of households and the competitiveness of industry.
The start of winter was mild, reducing gas and electricity consumption, and inflation has leveled off since November. Improved supply chains and the recent reopening of the Chinese economy have also helped.
The job market is still in good shape, with a historically low unemployment rate.
Over the whole of 2022, growth in the euro zone reached 3.5%, according to Eurostat, better than China (3%) and the United States (2.1%). The performance is above the forecast of 3.2% published in November by the European Commission.
The trend is the same for the whole of the European Union, with GDP stable in the fourth quarter and up by 3.6% over the full year.
On Monday, the International Monetary Fund (IMF) revised up its growth forecast for the euro zone in 2023 by 0.2 points, but it should cap at only 0.7%.
“Incredible resilience”
“The worst scenarios for this winter have been avoided, but the economy remains in a lethargic state” even if it has shown “incredible resilience”, underlines Bert Colijn, economist for ING bank. It does not rule out a drop in GDP in the first quarter.
If detailed macroeconomic figures are still lacking, “it is likely that household consumption contracted” in the last quarter, said Rory Fennessy, for Oxford Economics. According to him, growth was mainly maintained thanks to a fall in imports, which reveals a slowdown in activity. Growth for 2023 “will likely be weak,” he warns.
Andrew Kenningham of Capital Economics is a little gloomier still and foresees a recession in the euro zone in the first half of the year because of rate hikes by the European Central Bank (ECB), which should weaken investment by increasing the cost of credit. “The data deteriorated towards the end of the last quarter and the tighter monetary policy continues to affect households and businesses,” he said.
Among the major European economies, Spain (0.2% growth) and France (0.1%) played the role of locomotive. But more industrial economies such as Germany (-0.2%) and Italy (-0.1%) have started to pull back which could signal the start of a recession.