Europe’s Economy Edges Higher, Heading Off Forecasts of Recession

After a series of crises, investors, economists and policymakers have begun to grasp the brighter spots in the European economy: a few weeks of warmer winter weather, natural gas discountand an improvement in German investor sentiment.

Just a few months ago, governments planned to cut off electricity and gas distribution when the continent facing Russia’s gas-free winter. Now, leading inflation rates appear to be at or above peaks, and consumers have been surprisingly resilient to the economic turmoil.

“The overall picture is less dire than we thought a few months ago,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. The worst risks, of “a very severe recession, especially in energy distribution in winter, have been eliminated,” he said.

For now, the risk of an impending recession has been averted. The eurozone economy grew 0.1% in the final quarter of 2022 from the previous quarter, according to initial estimates by the regional statistics agency released on Tuesday.

Latest data arrives a few hours after International Monetary Fund raised its forecast for economic growth in the euro zone to 0.7 percent in 2023, from a 0.5 percent forecast made in October. The small increase is because the economy has gotten better. expected last year, along with lower natural gas prices and government financial support to protect households from some rising energy costs.

That’s another small piece of good economic news to add to a modest pile. Just this month, the ZEW index 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, showing only General Purchasing Managers’ Index, indicating that the economy was growing in January.

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

The conversation has shifted from expectations of a recession to, in some major economies, just a small economic slowdown, she said. However, she said the eurozone’s economy will slow significantly in 2023 compared to the previous year, adding that “it’s not been a great year but it’s much better than what we thought it would be.” We are concerned”.

But with the war in Ukraine, optimism about the European economy is extremely fragile.

Mr. Ducrozet said the past year had been a “lesson in humility” when it came to economic forecasting. He added that, looking at the year-to-date data, “it’s not bad but it’s not good either.”

On Monday, Germany reported that its economy unexpectedly contracted in the fourth quarter, putting Europe’s largest economy at risk of recession.

This shows that “if there is a risk, it is still a downside,” Mr. Ducrozet said. “Consumers have been hit by the biggest shock to real income since World War II because of this increase in inflation.”

This looks especially true in the UK, where data earlier this month showed the economy grew better than expected in November, up 0.1% month-on-month. This means the country will likely avoid an economic slowdown in the fourth quarter, staving off a recession.

But, that’s just temporary. The outlook in the UK is particularly stark and the IMF has lowered its forecast for the economy, predicting a 0.6% contraction in 2023, rather than 0.3% growth, citing tight fiscal policy, higher interest rates and high household energy bills.


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