why it matters
Stubbornly high inflation put many consumers across the continent in a cost-of-living crisis, prompting them to substantially cut back on spending during this period. Spending in the eurozone fell 0.3 percent in the first three months of this year after falling 1 percent in the previous quarter. Imports also declined sharply due to lack of demand for goods and services.
Public expenditure, which had soared during the pandemic lockdown, also registered a sharp decline in the first quarter, down 1.6 per cent from a year ago.
The slowdown reflects a contraction in Germany, the eurozone’s biggest economy, which reported last month that data for the first three months of the year showed its economy had plunged into recession amid an energy price shock.
But Thursday’s report showed mixed performance across the region, as southern European economies including Spain, Italy and Portugal posted strong growth rates, while Germany and the Netherlands shrank and France grew only modestly.
Since the spring, Europe’s overall economy has picked up pace slightly, and the European Commission has raised its growth outlook, forecasting an expansion of 1.1 percent this year and 1.6 percent in 2024.
“Looking ahead, we expect consumer spending to ease slightly now that inflation has eased, and we also expect government spending to pick up again,” Klaus Wittesen, chief eurozone economist at Pantheon Macroeconomics, wrote in a note. Will grow from.” “But this increase likely reflects a continued decline in investment, and a further reduction in inventory, as tighter credit standards.”
background
Governments had hoped to avoid a recession after massive spending to protect households and businesses from rising energy and food costs during the winter months, exacerbated by Russia’s war in Ukraine. Across Europe, countries quickly stockpiled energy reserves, and a mild winter, combined with massive conservation efforts, helped avoid the worst.
The strategy has helped drive down the price of energy, and bring inflation down from record highs in the eurozone’s biggest economies. In May, the annual rate of inflation was 6.1 percent, the eurozone’s lowest level in more than a year.
But the price of food and a range of services has continued to climb at an uncomfortable pace, raising the prospect that the European Central Bank will keep raising interest rates at its upcoming meetings. The International Monetary Fund has warned that the main challenge for European policy makers this year will be to contain inflation without preventing a severe recession.
what will happen next
Analysts said the slowdown was mild and unlikely to impact the economic recovery from the pandemic, but it still indicated that growth would remain sluggish for the rest of the year.
“It is difficult to argue that this is a bearish environment,” ING Bank said in a note to clients. “The stagnation of the economy however marks a clear cut from the recent post-boom.”
The next monetary policy meeting of the European Central Bank will be held next Thursday.
