1K
Monica Johnson, international banker
According to Eurostat statistics, the euro zone’s gross domestic product (GDP) remained flat in the final quarter of last year compared to the third quarter. With quarterly growth of 0 percent, the European Union’s monetary union narrowly avoided a recession that had been widely predicted days and weeks ago. However, as many analysts have observed, interest rates and energy prices are currently rising and are expected to continue rising in the coming months, leaving the euro area economy with a significant You will be forced to fight.
“Seasonally adjusted GDP in the fourth quarter of 2023 remained stable in both the euro area and the EU compared to the previous quarter,” EU statistics agency Eurostat said in preliminary figures for January 30. revealed. In the third quarter of 2023, GDP decreased by 0.1% in both zones. ” The first estimates of annual growth rates also found that GDP in 2023 increased by 0.5% in both the euro area and the EU.
Regarding the fourth quarter (Q4) GDP growth rate of each member country, Portugal led the way with an increase of 0.8% from the previous quarter, followed by Spain with 0.6%, and Belgium and Latvia with 0.4% each. . In fact, southern European countries as a whole were the leading economies that helped the eurozone avoid technical recession, defined as two consecutive quarters of negative growth, with Spain and Italy also at 0.6% each. A positive growth rate of 0.2% was recorded.
Conversely, Ireland (-0.7%), Germany and Lithuania (-0.3% each) came in last. Indeed, as the eurozone’s largest economy, Germany remains an important contributor to the eurozone’s long-term underperformance. The country narrowly avoided a technical recession thanks to a late upward revision in third-quarter numbers, but an industrial sector struggling with weak demand for increasingly uncompetitively priced exports and rising energy costs. continues to fight in the face of shrinkage. Meanwhile, Eurostat also reported that the GDP of France, the region’s second-largest economy, was flat, but its year-on-year growth rate was positive in six countries in the group and negative in five.
Like much of the world, the eurozone has suffered from steep interest rates over the past 18 months, with the European Central Bank (ECB) struggling to bring inflation down to 10.2% from its October 2022 peak. I am doing it. Nevertheless, with interest rates still at record highs and the ECB’s firm commitment to bring inflation down to its 2% target, the eurozone economy is expected to remain volatile through much of the first half of 2024. That year. And while recession territory may have been avoided, the euro area remains under the weight of persistently high interest rates, rising borrowing costs and soaring energy prices that continue to hurt Europeans and businesses. Pressure remains to achieve meaningful growth.
It seems premature to praise the economic standing of the euro area as a whole at this stage. “This does not change the situation significantly. Economic growth stalled in the summer due to the large-scale tightening of monetary policy,” Christoph Weil, senior economist at Commerzbank, said in a recent review of fourth-quarter numbers. stated in the memo. “It is unlikely that the economy will emerge from this downturn before the spring,” Weil said, adding that “remaining high inflation” meant that the European Central Bank was unlikely to be able to lower interest rates by the summer. It also said that the positive economic effects of this would not be meaningfully transmitted to the euro area economy until 2025. Economist Paul Donovan also criticized people who “keep making creepy laughs about two-quarters of negative growth” as useless. “The difference between -0.1% growth and 0% growth is completely meaningless from the perspective of living standards and what policy responses should be.”
Additionally, the US’s GDP growth rate was substantial at 4.9% in the fourth quarter, and the weak performance of the Eurozone in the same quarter suggests that the country’s economic partnership with the US has declined significantly. means. “In the euro area, consumption has been hit even harder by high inflation, as wage increases have been slower to adjust due to more negotiated wage settings. ,” ING senior economist Bart Koline wrote on January 30. “And the euro area energy crisis has undermined energy competitiveness, resulting in large differences in industrial performance.Furthermore, even though the euro area budget deficit remains large, fiscal support remains It’s much smaller than that.”
Nicola Mai, an economist and portfolio manager at asset management firm PIMCO (Pacific Investment Management Company LLC), said Europe is “still recovering from a prolonged energy shock, and in recent years it has fared less well than the more resilient U.S. economy.” “We have not experienced any fiscal stimulus.” year”. In an interview with the Guardian, Mai also pointed out that the euro zone’s shorter debt maturities “also mean that interest rate increases will be felt sooner.” As such, Mai predicted that the vulnerabilities that characterized the eurozone economy through much of last year “will continue into 2024.”
That slump could be exacerbated this year by robust wage growth, with the ECB potentially concerned that workers’ wage demands will become more frequent and substantial to address the cost of living crisis. . While wages in the EU did not rise as spectacularly as the US and UK at the beginning of the inflation crisis, they grew by a record 4.7% in the third quarter of 2023, exceeding the annual rate of 4.1%. Wage growth in the US is reported to be lower than the UK’s 6.5%, but overall for 2023, a 5.3% wage growth rate was recorded. This rate is expected to fall to 4.4% in 2024 (an ECB survey of 70 non-financial companies found that an “increasing number” of companies are planning to cut staff this year). The central bank is targeting maximum annual wage growth. It will be set at 3%, in line with the overall inflation target of 2%.
Interest rates could “remain high for an extended period of time” to deal with a potentially overheated labor market in the euro area. And with borrowing prices already at record levels, Europeans will continue to face intolerable living costs for some time, while stable growth rates for the economy remain elusive. “The region has avoided a technical recession. But this is just semantics. Jack Allen Reynolds, eurozone economist at Capital Economics, recently said that gas prices have soared and the ECB has started raising interest rates. Eurozone GDP has been flat since the third quarter of 2022, he added, adding that the eurozone economy “will remain flat”. It is scheduled for the first half of 2024 “as the effects of past monetary tightening continue to spill over and fiscal policy becomes more restrictive.”
Will the economy ease at all in the near future? Member countries will be enthused by several economic bright spots that continue to shine this year. “Survey indicators are showing signs of bottoming out, and real wage growth is slowly starting to recover. The latter should put more money in consumers’ pockets. Over the course of the year, the impact should become even stronger. ” said ING’s Colin. “And financial conditions are easing, and as a result, lending indicators are bottoming out to some extent. That will help investment in the second half of the year.” That said, the Dutch bank expects GDP growth to rise in the first quarter of 2024. He doesn’t expect it to improve significantly, but rather expects it to happen “much later this year.”
Consensus figures from a December survey of 48 economists by the Financial Times (FT) show that the euro zone economy will grow by just over 0.6% this year, compared to the ECB and International Monetary Fund (IMF). It is expected to be lower than the forecast of 0.8% and 1.2%. percentage each. Vitor Constancio, one of the economists surveyed by the FT and a former ECB deputy president, cited “a recession in Germany or Italy and a Trump victory” as the main risks to the euro zone economy this year.
Holger Schmieding, chief economist at Berenberg Bank, also argued that “If the United States abandons Ukraine and threatens the EU with a trade war, Europe and the rest of the world will suffer even more than the United States.” He added that election victory is the main threat to the United States. European economic outlook. Meanwhile, Mahmoud Pradhan, head of global macroeconomics at the Amundi Investment Research Institute, said the biggest risks to the eurozone are “a prolonged restrictive stance of monetary policy, including an accelerating pace of balance sheet unwinding, and “Decrease in fiscal policy support.” .
