March 31, 2023

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The European economy is picking up, beating recession expectations

The European economy is showing signs that it may avoid recession this winter, even as it continues to grapple with persistent inflation, rising interest rates and the war in Ukraine that shows no signs of abating.

The region’s statistics agency said on Tuesday that the euro zone economy grew 0.1 percent in the fourth quarter of 2022 compared to the previous quarter.

The data came hours later International Monetary Fund It raised its forecast for economic growth in countries that use the euro to 0.7% in 2023 from a forecast of 0.5% in October. The slight rise was due to a better-than-expected economy last year, supported by lower natural gas prices and government subsidies to protect households from some of the rise in energy costs.

“The news has become more positive in the past few weeks,” Christine Lagarde, the president of the European Central Bank, said earlier this month at the annual meeting of the World Economic Forum in Davos, Switzerland.

The data and projections offer some relief to governments that have been planning power outages and gas rationing like the continent I faced a winter without Russian gas Just a few months ago. Now, overall inflation appears to have peaked or passed and consumers have been surprisingly resilient in the face of economic turmoil.

“The big picture is less bad than we thought a few months ago,” said Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management. He said the worst risks of a severe recession or energy rationing have receded.

On Tuesday, France and Spain both reported rising inflation. In Spain, the rate unexpectedly picked up after being slow for five straight months. Data for the entire Eurozone will be released on Wednesday.

“If there is a risk, it is still the downside,” Ducrozet said. “Consumers have had the biggest real income shock since World War II because of this spike in inflation.”

However, there are positives to point out. Already this month, the ZEW indicator of German investor sentiment turned positive for the first time since February 2022, before the war in Ukraine, and a measure of economic activity across the eurozone, the Composite PMI, indicated that the economy was growing in January.

Lagarde said the conversation had shifted from expectations of a recession to a small recession in some large economies. However, she said the eurozone economy will slow significantly in 2023 compared to the previous year, adding, “It’s not a great year but it’s a lot better than we feared.”

But as the war drags on in Ukraine, optimism about the European economy is becoming very fragile.

Mr Ducrozet said last year was “a lesson in humility” when it came to economic forecasting. Looking at the data so far this year, he added, “It doesn’t look too bad but it doesn’t look good either.”

This seems particularly true in Britain, where data earlier this month showed that the economy fared better than expected in November, growing 0.1 percent from the previous month. This means that the country is likely to avoid an economic downturn during the fourth quarter, to avoid a recession.

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But this is only for now. The outlook in Britain is particularly harsh and the International Monetary Fund has lowered its forecasts for the economy, forecasting a decline of 0.6 percent in 2023, rather than growth of 0.3 percent. The effects of tight fiscal policies and a smaller workforce are expected to dampen the economy, while higher interest rates increase mortgage costs and higher household energy bills exacerbate the cost of living crisis.

“We expect a rather sharp slowdown this year” in Britain, Pierre-Olivier Gourinchas, chief economist at the International Monetary Fund, told a news conference. But he added that this comes after a better-than-expected economic turnout last year.

Across Britain and the Eurozone, inflation remains one of the biggest risks to the outlook. Amid signs that the overall rate has peaked, core inflationIt is a measure that excludes the volatile energy and food prices, remains continuously high. Consumer price gains are expected to continue at a brisk pace through 2023, and even once they begin to slow expectedly later in the year, the average household faces lost purchasing power because wages fail to keep pace with inflation.

Meanwhile, central bankers’ determination to bring inflation back to the 2% target could keep interest rates high, and force higher costs for mortgages and business loans across the continent, constraining the economy.

European policymakers worry that the energy shock is still working its way through the economy, while tight labor markets are raising wages in a way they fear is at odds with a return to inflation to the 2 per cent target.

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On Thursday, the Bank of England and the European Central Bank are expected to raise interest rates by half a percentage point.

At the Bank of England, it will be the tenth consecutive increase in interest rates, bringing the main rate to 3.5 percent, the highest level since 2008.

In the Eurozone, “Inflation by all measures, however you look at it, is very high,” Lagarde said. Thus, policymakers will “stay the course”, having already telegraphed that more half-point rate increases are to come.

As January winds down, Europe appears to have escaped the worst-case scenario of a recession through the winter but there is still significant uncertainty about its outlook. Some of that depends on what happens in the US, where opinions are divided on whether a The Federal Reserve’s efforts to eliminate high inflation It will push the economy into recession, with far-reaching repercussions later this year.

And then there The Unconfirmed Implications of China’s Turn on Coronavirus Non-Proliferation Policy. After three years of epidemic closures that have slumped China’s energy demand and disrupted manufacturing and international travel, will production rebound to smooth supply chains, and will Chinese tourists quickly spend their savings around the world? Will it cause additional inflationary pressures to worry central bankers? Answers will come in time.