The eurozone financial system stagnated late final yr as a lingering power disaster sparked a lack of competitiveness in some European industries, and customers reined in spending to grapple with excessive dwelling prices, Europe’s statistics company reported Tuesday.
However economists consider the worst could also be over, because the European Central Financial institution continues its marketing campaign to wring out inflation with out plunging the eurozone financial system right into a deep downturn.
Financial output within the 20 international locations that use the euro forex grew at zero % within the final three months of 2023 versus the earlier quarter, after contracting within the third quarter, narrowly avoiding a recession. In contrast with a yr earlier, the eurozone grew simply 0.1 %.
The anemic tempo is retaining Europe far behind america, the place the financial system, though slowing from a breakneck development tempo, continues to be powered by shopper spending. Aggressive rate of interest will increase by the Federal Reserve have introduced a slowdown in inflation, and the Fed is predicted to start unwinding these will increase quickly.
“The hole in financial exercise between the U.S. and eurozone is widening considerably in the intervening time,” mentioned Bert Colijn, chief eurozone economist at ING Financial institution. “We solely count on a cloth enchancment within the eurozone financial system a lot later within the yr.”
Dragging Europe down is a lack of competitiveness on the again of structural adjustments because the struggle in Ukraine and power disaster, he mentioned. The issue is stark in Germany, whose powerhouse manufacturing sector has slumped, turning Europe’s greatest financial system into an albatross for the area. The nation is unlikely to emerge from the downturn any time quickly, economists say.
European companies have been elevating wages, however at a sluggish tempo that has saved customers saving relatively than spending. Whereas the fast rise in costs for all the things from bread to fuel has cooled, it’s not but sufficient to totally cut back the ache for households, whereas wage will increase have added to producers’ prices.
In its newest financial outlook, launched Tuesday, the Worldwide Financial Fund cited “notably subdued” development in Europe, reflecting “weak shopper sentiment, the lingering results of excessive power costs, and weak spot in interest-rate-sensitive manufacturing and enterprise funding.” It forecast development within the eurozone to rise solely 0.9 % this yr.
That has turned up the challenges dealing with policymakers on the E.C.B., who, just like the Fed, had ratcheted up rates of interest to curb the rise in costs earlier than not too long ago pausing their marketing campaign. There are indicators that the E.C.B.’s techniques have succeeded in not pushing the financial system off a cliff, as economists had feared, however are relatively beginning to pave the best way for a modest restoration. Buyers count on the central financial institution to start out chopping charges as early as April, a transfer that might unlock extra financial exercise.
Rory Fennessy, Europe economist at Oxford Economics in London, mentioned that whereas any pickup can be gradual, “we anticipate fading headwinds in Europe to assist a restoration in development all through 2024.”
The power of any bounce could rely closely on Germany’s fortunes. The German financial system shrank 0.3 % within the fourth quarter, after flatlining within the earlier two quarters, retaining it in a “twilight zone between recession and stagnation,” mentioned Carsten Brzeski, the pinnacle of world head of macroeconomics at ING.
France, the bloc’s second-biggest financial system, did not broaden within the fourth quarter amid a fall in consumption and slowdown in funding. The federal government has elevated the minimal wage eight occasions since 2021 to assist staff fight a cost-of-living disaster, however many individuals nonetheless really feel they’re falling behind. Irate farmers have blockaded the nation within the final week, partly to air grievances over low wages and declining livelihoods introduced on by inflation.
Progress has been extra sturdy in main international locations alongside Europe’s southern rim, together with Spain and Portugal, revealing a European financial system that seems more and more to be working at two speeds. The Spanish financial system grew 0.6 % from October to December, pushed by a tourism increase, whereas Portugal’s expanded 0.8 %.
Economists see extra indicators of a possible restoration rising within the coming months. The prospect of a attainable rate of interest minimize by the E.C.B. might stimulate lending to manufacturing and stoke extra companies funding, in addition to a tepid revival within the European actual property markets, which slowed sharply final yr.
And whereas wages have solely began to get well, the prospect of an extra decline in costs could get customers to start out spending extra, pumping more cash into the financial system and serving to to spice up development.
“A smooth touchdown of the European financial system stays the most probably state of affairs over the close to time period,” S&P World rankings mentioned in a current analysis observe.