Eurozone economy stagnates as Germany struggles

THE eurozone economy stagnated last year, weighed down by an industrial malaise in Germany, its former powerhouse, data showed on Tuesday (Jan 30).

The 20 countries that share the euro barely avoided an outright recession in the final quarter of last year, even as the zone’s biggest trading partner, the US, chalked up impressively brisk growth.

The eurozone’s underperformance was mostly due to weakness in Germany, which has seen its business model – predicated on cheap energy from Russia and intense two-way trade with China – upended by geopolitical events.

The eurozone’s largest economy shrank by 0.3 per cent in the last three months of 2023; output for the bloc as a whole was flat, helped by expansions in Spain and Italy, Eurostat’s flash or preliminary figure showed.

The zero per cent quarter-on-quarter figure for the October-to-December period beat forecasts. Analysts for Bloomberg and financial data firm FactSet had predicted a contraction of 0.1 percent in Q4.

There were fears that, if the predictions had been correct, that would have meant two consecutive quarters of contraction – the threshold for a technical recession.

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The latest figure marked the sixth consecutive quarter of no or little growth. Economists expect more of the same in the coming months.

“The outlook for 2024 continues to be challenging amid faltering demand and increasing geopolitical tensions,” said Diego Iscaro, head of Europe economics at S&P Global Market Intelligence. “We think that eurozone activity will remain virtually stagnant during the first half of 2024.”

Similarly, Jack Allen-Reynolds of Capital Economics, an economic research firm, said: “We think that (the eurozone economy) will flatline in the first half of this year too, as the effects of past monetary tightening continue to feed through and fiscal policy becomes more restrictive.”

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He added that the eurozone dodging a technical recession was “just semantics”.

“The big picture is that eurozone GDP has been flat since Q3 2022, when gas prices surged and the ECB (European Central Bank) started raising interest rates,” he said.

This was in stark contrast with the United States.

While both economies have been subject to a steady diet of interest rate hikes by their central banks in response to a surge in inflation, the US shrugged off dire predictions of recession and grew by 2.5 per cent last year.

Eurostat did not provide an annual figure for the eurozone overall with the report, which is subject to change, particularly due to possible revisions in Irish output, but this was likely to be just above zero.

The new year kicked off with a wave of strikes and protests over inflation, including several by farmers in Germany and France who oppose plans to gradually reduce subsidies from the European Union.

With inflation now falling, workers are likely to regain some purchasing power this year. Meanwhile, likely rate cuts by the European Central Bank (ECB) should also ease pressure on the battered construction sector.

But this may prove too little, too late, said Christoph Weil, an economist at Commerzbank.

“A significant upturn is also unlikely for the rest of the year,” he said.

“In view of persistently high inflation, the ECB is unlikely to lower its key rates before the summer, and this is unlikely to have a positive impact on the economy until 2025.”