According to a report by CNN, Europe’s economy managed to avoid a recession in the winter, with GDP picking up slightly in the first quarter of 2023 despite Russia’s war in Ukraine and significant interest rate hikes.
The first initial estimate of GDP showed that economic output in the European Union rose by 0.3% in the first three months of 2023 compared to the previous quarter. However, output among the 20 countries that use the euro increased only by 0.1%. During the last three months of 2022, GDP had fallen 0.1% in the European Union and remained flat in the euro zone.
While the latest numbers indicate that the region has narrowly avoided a recession, economists and investors warn that it is not out of the woods yet. They expect that economic activity will take a hit later this year as borrowing costs rise, dampening households’ and businesses’ appetite for credit and weakening consumer demand.
There are also concerns that global banking sector turmoil could make it harder to access loans. Christoph Weil, a senior economist at Germany’s Commerzbank, notes that “we consider it unlikely that this marks the beginning of a sustained economic revival…in the second half of the year the massive rate hikes by central banks worldwide are likely to apply the brake on growth.”
Despite a forecast by the European Commission that both the bloc and the euro zone would enter a technical recession over the winter, and that growth would not return until the spring, unseasonably warm weather, a pullback in energy prices, and the reopening of China’s economy have provided some relief. However, economists are still cautious as there are signs of economic “divergence” between countries. For example, Germany, the European Union’s largest economy, stagnated during the first three months of this year, while France, Spain, Italy, and Portugal experienced varying levels of growth.
Looking ahead, economists expect demand for goods and services across the region to dwindle as higher interest rates gradually feed through to the real economy. While the International Monetary Fund has called on the European Central Bank to keep raising interest rates until the middle of 2024 to fight persistent inflation, if rates are pushed higher for longer, that could take a toll on the region’s economy. Andrew Kenningham, chief Europe economist at Capital Economics, warns that “we expect any growth to be feeble and still see a significant risk of recession.”
