Eurozone avoids a recession – but the full impact of rate hikes is yet to be felt

The eurozone avoided a recession at the end of last year, but sluggish performances from the bloc’s largest economies ensured that growth remained elusive.

Official figures confirmed today that the bloc stagnated in the final three months of last year, which was an improvement on the 0.1 per cent contraction expected by economists.

The German economy saw a 0.3 per cent contraction in the fourth quarter while the French economy was stagnant for the second quarter in a row. This helped to offset stronger performances elsewhere, such as in Spain were growth hit 0.6 per cent.

Michael Field, European market strategist at Morningstar, said that a “rebound in the peripheral economies” helped the bloc escape a recession.

“While not blistering, this growth helped mitigate depressed growth in Europe’s two powerhouse economies of Germany and France,” Field said.

Across 2023 as a whole, this meant the eurozone grew 0.5 per cent, a far cry from the 3.1 per cent expansion seen in the US over the same period.

Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, commented: “The big picture is that euro-zone GDP has been flat since Q3 2022 when gas prices surged and the ECB started raising interest rates”.

After Russia’s invasion of Ukraine sent energy prices skyrocketing, the ECB has hoisted interest rates to a 22-year high. With inflationary pressures easing, markets are now predicting an imminent easing in policy.

Inflation across the bloc ended 2023 at 2.9 per cent, down from a peak of 10.6 per cent in October 2022.

However, core inflation remains higher at 3.4 per cent, while services inflation is stuck at four per cent. Policymakers are also concerned that wage growth remains too high.

Last week, Christine Lagarde, president of the ECB, warned that it was still “premature” to discuss cutting rates.

Allen-Reynolds warned that things were unlikely to get any better in the first half of 2024. “We think that it will flat-line in the first half of this year too as the effects of past monetary tightening continue to feed through and fiscal policy becomes more restrictive,” he said.