. Unexpected growth in the euro zone's fourth quarter prevents a recession - Capital street fx

Unexpected growth in the euro zone’s fourth quarter prevents a recession.

Unexpected growth in the euro zone’s fourth quarter prevents a recession.

31 Jan 2023

The eurozone eked out growth in the final three months of 2022, avoiding a recession even as sky-high energy costs, waning confidence, and rising interest rates took a toll on the currency bloc’s economy, data from Eurostat showed on Tuesday.

Gross domestic product in the eurozone expanded by 0.1% in the fourth quarter, outperforming expectations in a Reuters poll for a 0.1% drop. Compared to a year earlier, growth was 1.9%, above expectations of 1.8%.

Among the bloc’s biggest countries, Germany and Italy recorded negative growth rates for the quarter but France and Spain expanded, Eurostat added, based on a flash estimate that is subject to revisions.

Russia’s nearly year-old war in Ukraine has proved costly for the eurozone, which now spans 350 million people in 20 countries, given some members’ heavy reliance on cheap energy.

Surging oil and gas prices have depleted savings and held back investment while forcing the European Central Bank into unprecedented rate hikes to arrest inflation.

But the economy has displayed some unexpected resilience, too, much like during the COVID-19 pandemic, when growth outperformed expectations as businesses adjusted faster to changed circumstances than policymakers had predicted.

More recent figures like a crucial confidence indicator or the latest PMI data suggest that growth has hit bottom already and a slow recovery is underway, helped by a mild winter that has limited energy spending.

With market-based energy prices hovering at pre-war levels, the International Monetary Fund upgraded its growth projection for the bloc on Monday, citing unexpected resilience, helped by generous government support.

The IMF now sees growth at 0.7% for the full year, above its 0.5% forecast of October and the 0.5% predicted by the European Central Bank in December.

But even if the bloc is doing better than feared, growth in 2023 will be among the weakest on record due to a large drop in real incomes and surging interest rates.

The ECB has raised rates by a combined 2.5 percentage points to 2% since July to tame inflation, and markets see another 1.5 percentage points of increases by mid-year, which would put the deposit rate at its highest level since the turn of the century.

Such a rapid increase is putting a brake on bank lending, a key source of credit for businesses and access to loans has already suffered the biggest drop last quarter since the bloc’s 2011 debt crisis.