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Eurozone economy shrinks for two quarters in a row

The eurozone economy shrank over the past two quarters, according to downgrades published on Thursday, which showed that output in the bloc declined at a quarterly rate of 0.1 per cent in both three-month periods.

The downgrades, which represent the mildest of technical recessions, take some shine off the recent performance of the eurozone economy, which has done better than many economists feared when the bloc was hit by an energy and cost of living crisis.

Analysts said the move could erode confidence in the eurozone economy’s resilience and make European Central Bank rate-setters more hesitant to carry on increasing borrowing costs.

“The word ‘technical recession’ can have a bit of an impact on the tone of the debate,” said Holger Schmieding, chief economist at German bank Berenberg. “It reduces the probability that the ECB could raise rates further after the summer break.”

The ECB has signalled it is likely to raise interest rates by another quarter percentage point at its meeting in Frankfurt next week and investors are betting it will agree a similar move in July and then pause.

Eurostat, the EU’s statistics office, said on Thursday that the gross domestic product of the 20-country single currency bloc shrank 0.1 per cent quarter on quarter in both the first three months of this year and the final three months of last year. The statistics office had previously said that the economy expanded by 0.1 per cent in the first quarter and was flat during the final three months of 2022.

“It’s a recession after all,” Carsten Brzeski, head of macro research at Dutch bank ING, wrote on Twitter on Thursday. “Here goes strong resilience and comes stagnation,” Brzeski said, referring to the optimistic tone of recent remarks of ECB officials.

Eurostat said the eurozone economy was dragged down by a 0.3 per cent drop in household consumption in the first quarter, while government spending dropped 1.6 per cent. This offset a 0.6 per cent rise in investment and a positive contribution from trade, after a 0.1 per cent dip in exports was outweighed by a 1.3 per cent drop in imports.

The downgrade followed cuts in the first-quarter GDP estimates of several members of the single currency area in recent weeks, including Germany, Ireland and Finland. Greece undershot expectations by announcing on Wednesday a 0.1 per cent decline in its first-quarter GDP.

Schmieding said that without a 4.6 per cent drop in Irish first-quarter GDP caused by intellectual property shifts at big multinational companies and a sharp drop in German government spending, the eurozone would have grown 0.4 per cent in the period.


Source: Economy - ft.com

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