Yahoo Finance Eurozone sinks into recession
The eurozone fell into a recession at the start of this year as an ongoing cost of living crisis continues to pressure households.
According to revised data from Eurostat on Thursday, gross domestic product (GDP) across the bloc was revised down to a contraction of 0.1%, downgraded from a previous estimate that the economy stagnated.
Economists polled by Reuters had forecast on average zero and 1.2% expansion for Q4 2022 and Q1 2023.
It was hit by a combination of soaring inflation and rising interest rates, as household consumption declined, as well as Russia’s war on Ukraine which has pushed energy and food prices higher.
It follows a decrease of the same amount in the fourth quarter of 2022, meaning the eurozone started the year in recession and shrunk for two quarters in a row – the standard definition of a technical recession.
Government consumption also fell sharply by 1.6% quarter on quarter, while gross fixed capital formation, which tracks investment, increased by 0.6% between January and March.
Looking at trade, exports were broadly unchanged, decreasing by 0.1%, and imports fell by 1.3%, indicating that demand was hit by the cost-of-living squeeze.
Euro area #GDP -0.1% in Q1 2023, +1.0% compared with Q1 2022 https://t.co/CybdBFvQxH pic.twitter.com/jkkFXaUBaC
— EU_Eurostat (@EU_Eurostat) June 8, 2023
Economists are now warning that the eurozone is likely to contract further during the rest of 2023.
“Today’s data mean that the eurozone has experienced two successive quarters of negative GDP growth and therefore met the standard definition of a recession – albeit only by a fraction and partly thanks to a big fall in Ireland’s GDP data which don’t give an accurate picture of the underlying situation,” Andrew Kenningham, chief Europe economist at Capital Economics, said.
“The big picture, however, is that the euro-zone economy was broadly stagnant during the past two quarters – and we think GDP is likely to contract again in Q2 as the effects of monetary policy tightening continue to feed through.”
The eurozone was mainly dragged down by Ireland, where GDP fell by 4.6% in the first quarter, driven by a contraction in the multinational dominated industry sector. Lithuania’s economy shrank by 2.1%, while the Netherlands contracted by 0.7%.
Germany, which is Europe’s largest economy, shrank by 0.3%, and is also in recession, the data showed. On the opposite end of the scale, Poland recorded the highest increase of GDP at 3.8%, followed by Luxembourg’s 2% increase quarter-on-quarter, and Portugal at 1.6%.
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The European Commission forecast in mid-May that growth for the year would reach 1.1% across the 20 countries that use the single currency. Meanwhile Euro area annual inflation is expected to be 6.1 % in May, down from 7.0% in April, but still three-times higher than the ECB’s target.
Bert Colijn, ING’s senior economist for the eurozone, said: “Overall, the eurozone economy is very much back to muddling through, as monetary policy starts to weigh more heavily on activity, post-pandemic spending fades and the energy crisis looms.”
Watch: What is a recession and how do we spot one?
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