Eurozone economy is flattening, gap with US widening

Eurozone economy is flattening, gap with US widening

The eurozone economy stagnated late last year as the energy crisis reduced the competitiveness of some European industries and consumers restrained spending to cope with higher living costs, Europe’s statistics agency reported on Tuesday.

But economists believe the worst may be over, as the European Central Bank continues its campaign to reduce inflation without pushing the eurozone economy into a deep recession.

Economic output in the 20 countries that use the euro currency grew at a rate of zero percent in the last three months of 2023 compared with the previous quarter, narrowly avoiding recession, after a contraction in the third quarter. Compared with a year earlier, the eurozone rose only 0.1 percent.

The weak momentum is putting Europe far behind the United States, where the economy, though slowing to a breakneck growth pace, continues to be driven by consumer spending. Aggressive interest rate increases by the Federal Reserve have led to a slowdown in inflation, and expectations are that the Fed will soon begin reducing those increases.

“The gap in economic activity between the US and the eurozone is widening at the moment,” said Bert Colijn, chief eurozone economist at ING Bank. “We expect a material recovery in the eurozone economy much later this year.”

What is dragging Europe down is a loss of competitiveness due to structural changes since the war in Ukraine and the energy crisis, he said. The problem is acute in Germany, whose powerhouse manufacturing sector has been in decline, hurting the region in Europe’s largest economy. Economists say the country is unlikely to emerge from recession any time soon.

European businesses are raising wages, but at a slow pace, causing consumers to save rather than spend. While the sharp rise in prices of everything from bread to gas has cooled, it is still not enough to fully ease families’ pain, while wage increases have increased manufacturers’ costs.

In its latest economic outlook released Tuesday, the International Monetary Fund cited “significantly lower” growth in Europe, driven by “weak consumer sentiment, the lingering effects of higher energy prices and a decline in interest rate-sensitive manufacturing and business investment.” Shows “weakness”. It estimates that growth in the eurozone will increase by only 0.9 percent this year.

That adds to the challenges facing policymakers at the ECB, which, like the Fed, recently raised interest rates to stem price rises before halting its campaign. There are signs that the ECB’s strategies have not succeeded in pushing the economy off the cliff, as economists had feared, but are beginning to pave the way for a modest recovery. Investors expect the central bank to start cutting rates as early as April, a move that could open up more economic activity.

Rory Fennessy, Europe economist at Oxford Economics in London, said that although any acceleration would be gradual, “we anticipate weak headwinds to support a recovery in growth in Europe through 2024.”

The strength of any surge may depend to a large extent on Germany’s fortunes. After declines in the previous two quarters, the German economy shrank 0.3 percent in the fourth quarter, leaving it in the “twilight zone between recession and stagnation,” said Carsten Brzeski, global head of macroeconomics at ING.

France, the bloc’s second-largest economy, failed to expand in the fourth quarter amid a decline in consumption and a slowdown in investment. The government has increased the minimum wage eight times from 2021 to help workers cope with the cost of living crisis, but many still feel they are being left behind. Angry farmers have imposed a blockade in the country last week over complaints of low wages and declining livelihoods due to inflation.

Growth has been stronger in key countries along Europe’s southern edge, including Spain and Portugal, reflecting a European economy increasingly operating at two speeds. Spain’s economy expanded 0.6 percent in the fourth quarter from a year earlier, while Portugal’s economy expanded 0.8 percent due to a surge in tourism.

Economists see more signs of a potential recovery in the coming months. The prospect of a potential interest rate cut by the ECB could spur lending to the manufacturing sector and investment by more businesses, as well as a slow revival in European real estate markets, which slowed sharply last year.

And while wages are just beginning to recover, the prospect of further price declines could lead consumers to start spending more, pumping more money into the economy and helping boost growth.

“A soft landing for the European economy remains the most likely scenario in the near term,” S&P Global Ratings said in a recent research note.

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