© Reuters. Image of euro coins immersed in water.
BRUSSELS (Reuters) – The euro zone economy entered a technical recession in the first three months of 2023, according to data released today by Eurostat, and there are signs that central bank rate hikes will reduce the prospects for future growth of the region.
The gross domestic product (GDP) of the 20 eurozone countries fell by 0.1% in the first quarter compared to the last quarter of 2022, when, equally, GDP decreased by 0.1%, a revised figure compared to a previous reading which was zero. Two consecutive quarters of contraction is commonly described as a technical recession.
“Domestic demand is not seeing good momentum,” analysts at Oxford Economics said in a note, adding that Q1 government spending witnessed the biggest contraction on record, except during the period of the first wave of lockdowns linked to the coronavirus in 2020.
“Going forward, growth will remain weak despite falling wholesale energy prices, as monetary policy tightening curbs investment and still-present inflationary pressures constrain consumption.”
Separately, economists polled by Reuters expect quarterly growth to rebound by a modest 0.2% in each of the remaining three quarters of this year and suggest the European Central Bank opts for hikes by another 25 basis points at both in June than in July, in an attempt to counter stubborn inflation.
That would take the ECB’s deposit rate to 3.75%, in an unprecedented squeeze of 425 basis points since the bank moved rates from negative territory last July.
Statistics agency Eurostat said euro zone GDP rose 1.0% in the first quarter from a year earlier, a lower reading than the flash estimate of a 1.3% increase released on May 16th. Economists polled by Reuters had forecast an annual expansion of 1.2% and zero growth in the quarter.
The revision is mainly due to a second estimate from the German statistics office, which showed that the eurozone’s largest economy was in recession at the start of 2023.
In Ireland, the economic contraction rose to 4.6% from the preliminary estimate of 2.7%, despite this negative figure being due to the impact of large multinationals on the country’s growth.
A recession was expected towards the end of last year, as the eurozone grappled with high energy and food prices and an easing post-pandemic spending boom. However, initial estimates suggest that the region has avoided this situation.
In addition to Germany and Ireland, GDP also recorded a quarter-on-quarter decline in Greece, Lithuania, Malta and the Netherlands.
Eurostat reported that household expenditure fell by 0.1 percentage points, public expenditure by 0.3 points and changes in inventories by 0.4 points of quarterly GDP. Gross fixed investment rose by 0.1 points and net trade by another 0.7 points, thanks to the drop in imports.
Conversely, employment growth accelerated in early 2023, rising to 0.6% in the first quarter from 0.3% in the fourth quarter of 2022, in line with previous estimates. The year-on-year increase was 1.6%.
On a quarterly basis, employment increased in all countries except Greece, Lithuania and Slovakia.
(Translated by Chiara Scarciglia, editing Stefano Bernabei)