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Eurozone economy flatlines in fourth quarter

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The eurozone economy was stagnant in the final three months of last year, held back by shrinking German output and stalled French growth that offset a stronger than expected rebound in Spain and Italy.

The flat performance of the 20 economies that share the euro was better than the 0.1 per cent contraction forecast by economists in a Reuters poll. It followed a 0.1 per cent decline in the previous quarter and meant the eurozone grew 0.5 per cent last year, the EU’s statistics office said on Tuesday.

That left the bloc trailing the US, which last week established itself as the world’s fastest-growing advanced economy in 2023 with annual growth of 3.1 per cent. China’s government recently estimated its economy grew 5.2 per cent last year.

“Europe is still recovering from a lingering energy shock and has not experienced the same degree of fiscal stimulus as the more resilient US economy in recent years,” said Nicola Mai, a sovereign credit analyst at investor Pimco.

The main drag on eurozone growth was the German economy, which shrank 0.3 per cent in the period, dragged down by falling investment in construction, machinery and equipment, the country’s statistical agency said on Tuesday, confirming an initial estimate earlier this month.

The stalling of French gross domestic product in the fourth quarter followed a similar outcome in the third quarter, which was revised up on Tuesday from an earlier estimate of a 0.1 per cent contraction by Insee, the French statistics agency.

Italy’s economy, in contrast, provided a boost after it expanded 0.2 per cent in the period thanks to stronger output in industry and services that offset weaker domestic demand. That was up from 0.1 per cent growth in the previous quarter and was stronger than the stagnation forecast in a Reuters poll.

The Spanish economy also accelerated faster than expected by economists with quarterly growth of 0.6 per cent, its strongest expansion of the year, thanks to rising domestic demand.

Spain’s statistics office also said higher electricity prices, reflecting a phasing out of tax breaks, caused inflation to unexpectedly pick up from 3.3 per cent in December in January to 3.5 per cent. Economists had expected a slowdown to 3.1 per cent.

Investors will be watching to see if inflation across the bloc dips as expected to 2.8 per cent in January from 2.9 per cent a month ago, when price data is released on Thursday. The figures will be a key indicator of how close the European Central Bank is to cutting interest rates.

The figures published on Tuesday showed Spain’s economy grew 2.5 per cent last year, while France expanded 0.9 per cent and Italy grew 0.7 per cent. Germany’s economy, however, contracted 0.3 per cent over the year.

Economists are expecting the eurozone economy to pick up slightly this year as falling inflation and continued wage growth boosts the spending power of consumers. The strong labour market, with unemployment hitting a record low of 6.4 per cent in November, should also support demand.

However, governments are withdrawing many of the energy and food subsidies they introduced to cushion the impact of the recent surge in the cost of living that followed Russia’s full-scale invasion of Ukraine, which could weigh on any rebound.

The European Commission said last week its flash estimate of the consumer confidence indicator showed it had fallen 1 point to minus 16.1 in the euro area, taking it further below the long-term average.

Eurozone businesses were still struggling with weak demand at the start of this year, according to a survey of purchasing managers released by S&P Global last week, which found activity continued to decline in January, albeit at the slowest pace for six months.

“The expected fall in inflation should help to support households’ finances, although this positive impact will be at least partly offset by less supportive fiscal conditions,” said Diego Iscaro, an economist at S&P Global.


Source: Economy - ft.com

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