LDN - Business

Euro zone economy unexpectedly grows in Q4 but weak 2023 looms

[January 31, 2023] By Balazs Koranyi

FRANKFURT (Reuters) -The euro zone eked out growth in the final three months of 2022, managing to avoid a recession even as sky-high energy costs, waning confidence and rising interest rates took a toll on the economy that is likely to persist into this year.

Gross domestic product across the currency bloc expanded by a tiny 0.1% in the fourth quarter, data from Eurostat showed on Tuesday, outperforming expectations in a Reuters poll for a 0.1% drop. Compared to a year earlier, growth was 1.9%, just beating expectations of 1.8%.

Among the biggest euro zone countries, Germany and Italy recorded negative growth rates for the quarter but France and Spain expanded, Eurostat added, based on a flash estimate that is subject to revisions.

Russia's nearly year-old war in Ukraine has proved costly for the euro zone, which now spans 350 million people in 20 countries, given some members' heavy reliance on cheap energy.

Surging oil and gas prices have depleted savings and held back investment, while forcing the European Central Bank into unprecedented rate hikes to arrest inflation.

But the economy has displayed some unexpected resilience, too - much like during the COVID-19 pandemic, when growth outperformed expectations as businesses adjusted faster to changed circumstances than policymakers had predicted.

More recent figures like a crucial confidence indicator or the latest PMI data suggest growth may have hit bottom already and a slow recovery is underway, helped by generous government support and a mild winter that has limited energy spending.

The overall picture nevertheless remains weak, with meagre growth forecast for 2023 due to a large drop in real incomes and surging interest rates.

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People buy fruit and vegetables in a street market in Rome, Italy, August 11, 2016. Picture taken August 11, 2016. REUTERS/Max Rossi

"The headline GDP figure gives a misleadingly favourable impression of economic conditions in late 2022," said Ken Wattret, an analyst at S&P Global Market Intelligence.

"The key takeaway from member states' data is the breadth of weakness in private consumption, with the acute squeeze on household real incomes due to soaring inflation belatedly biting."

Ireland's 3.5% Q4 growth figure distorted the overall picture as it was driven largely by activity among big foreign companies based there for tax reasons, economists said, adding that without Ireland, euro zone growth would have been zero.

The ECB has raised rates by a combined 2.5 percentage points to 2% since July to tame inflation, and markets see another 1.5 percentage points of increases by mid-year, which would put the deposit rate at its highest level since the turn of the century.

Such a rapid increase is putting a brake on bank lending, a key source of credit for businesses, and access to loans has already suffered the biggest drop last quarter since the bloc's 2011 debt crisis.

"In the coming months, the noticeable tightening of monetary policy will increasingly slow down the economy," Commerzbank economist Christoph Weil said.

"We continue to expect the euro area economy to contract slightly in the first half of the year, and the recovery expected in the second half is likely to be weak."

(Reporting by Balazs Koranyi; Editing by Catherine Evans)

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