Eurozone Officially Enters Recession

The eurozone confounded previous forecasts and shrank for two consecutive quarters, figures on Thursday showed, as energy shocks, Russia’s war in Ukraine, inflation, and monetary tightening gnawed at growth momentum over the winter.

Data showed the 20-nation currency area wasn’t able to dodge a recession — albeit a very shallow one for now — making politicians’ sense of optimism about the eurozone’s economic resilience to such challenges look premature.

GDP shrank by 0.1 percent over the first three months of 2023, according to the revised data from Eurostat, the EU’s statistics office. The news was made worse by its revision of the last quarter of 2022 — to a contraction of 0.1 percent, having previously forecast 0 percent. A recession is defined as two successive quarters of contraction.

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The figures make difficult reading for governments battling Europe’s cost-of-living crisis triggered by Russia’s invasion and resulting soaring energy prices, and heap pressure on the European Central Bank, which has been engaging in unprecedented interest-rate hikes to try to contain record inflation.

The data is worse than previously signaled. Flash estimates released in April suggested growth of 0.1 percent in the eurozone for the first quarter of the year. The downward correction follows data from Germany, the eurozone’s largest economy, showing that it also shrank for a second consecutive quarter and slipped into recession.

In total, eight EU countries contracted in the first three months of the year, with Ireland shrinking the most, by 4.6 percent, because of a decline in exports from multinational companies. Lithuania, the Netherlands, Estonia, Malta, Hungary and Greece were also in negative territory.

On a positive note, employment continued to increase in the eurozone, by 0.6 percent in the first quarter of this year, up from 0.3 percent in the previous quarter.

The ECB’s governing council next meets to set interest rates on June 15.

“The June rate hike is baked in but it [the contraction] strengthens the case of those who want to hit pause afterward,” said Daniel Kral, senior economist for Europe at Oxford Economics. “There is more pain to come from the tightening that happened late last year.”

The bank wants to continue raising rates to “sufficiently restrictive levels” to bring inflation back to its target of 2 percent over the medium term, ECB President Christine Lagarde told members of the European Parliament on Monday.

The ECB estimates that monetary tightening is expected to shrink GDP by 2 percentage points on average over the period 2022-2025, with a peak expected this year.

“The muddle-through will continue,” said Ludovic Subran, chief economist at Allianz. “The ECB’s determination to kill inflation will be tainted by fears of recession as we tip-toe for the next quarters.”

POLITICO