Europe in recession, no engines of growth

Europe in recession, no engines of growth
All of Europe's economies contracted in the third quarter as the EU slips into recession. / bne IntelliNews
By bne IntelliNews December 9, 2023

The latest GDP figures show that the eurozone contracted in the third quarter and looks like it will do the same in the last three months of the year falling into a continent-wide recession, Oxford Economics said in a note on December 8.

“Final figures confirmed eurozone GDP contracted 0.1% in the third quarter. What's more, the detailed breakdown showed the European economy has no engines of growth at the moment. Although private consumption posted a small gain over the previous quarter, the near-term outlook still looks dire, and with both investment and exports unlikely to provide much momentum, the economy looks set to slide into recession in the fourth quarter,” Oxford Economics said.

A detailed breakdown of the data reveals a lack of growth drivers, with household spending showing only a modest gain, fixed investment remaining flat and a decline in both exports and imports, resulting in no contribution from the external sector.

As bne IntelliNews reported, the boomerang effect of sanctions on Russia and the ongoing polycrisis is now hurting Europe more than Russia. Russian President Vladimir Putin was crowing in front of investors at the annual Russia Calling! Investment conference last week, after Russia put in a surprisingly good year and managed to dodge most of the ill-effects of the extreme sanctions imposed on it following the invasion of Ukraine last year. Russia is now the biggest and fastest growing economy in Europe (in PPP terms), the president boasted.

Germany, the traditional engine of European growth, has stalled and already gone into recession. Recently plunged into a funding crisis, after the Constitutional court ruled that German Chancellor Olaf Scholz could not reassign €60bn of Covid relief money to environmental spending, the Bundestag has had to freeze all non-essential spending and continues to grapple with economic weakness. Germany has been particularly hard hit by the rebound effects of sanctions on Russia, as a quarter of its economy is industry that was heavily reliant on cheap Russian energy and much of that has been economically unviable as a result of soaring energy and gas prices.

“The near-term outlook remains unambiguously gloomy, and there is a high likelihood the eurozone will slide into recession in the fourth quarter, under the classic definition of two consecutive quarters of GDP contraction,” Oxford Economics said. “Whether a recession happens or not is mostly inconsequential in the sense that the difference between stagnation and a small contraction in GDP has little macroeconomic significance. What is more relevant is the almost certainty that the economy will continue to struggle to gather any momentum in the last part of the year.”

Oxford Economics reports that weakness remains centred around the industrial sector, especially in Germany, where another decline in output in the fourth quarter looks likely. But retail sales also continue to show a lacklustre trend of European consumers paying a lot more but purchasing less goods than a year ago.

Despite these challenges, there are glimmers of hope on the horizon as forward-looking indicators suggest that the worst may have already passed. Sentiment indices, including Sentix, ifo, ZEW and PMIs, all indicate a positive change, setting the stage for the initial phase of the gradual recovery expected in 2024.

But the operative word there is “gradual”. While the eurozone may go back to growth, it will only happen slowly. The EU forecasts for the fourth quarter suggest that most of the member states will put in some sort of positive growth in the last quarter of this year, but nearly all of them will be fractions of 1%, which can also be characterised as stagnation.

Moreover, the rapid disinflation currently taking place in the Eurozone is prompting a reassessment of expectations for growth-boosting interest rates next year. Previously the European Central Bank (ECB) indicated in comments that the chances of rate cuts in 2024 were low, given the persistent and sticky high inflation rates. Most forecasters have moved up their expected date for the first rate cut to April 2024, with markets even betting on a March rate cut. Market pricing suggests approximately 140 basis points of cuts in 2024, potentially bringing the deposit rate to 2.6%.

While some forecasters still anticipate stable or rising inflation in 2024, this view is at odds with current market pricing for rates. It is expected that inflation forecasts will align more closely with market expectations in the coming months, says Oxford Economics.

1223 EURO GDP macro no engines of growth OXFORD ECONOMICS

1223 EURO polls macro ecnomic sentiment indicators PMI IFO ZEW Sentix OXFORD ECONOMICS