The eurozone slid into recession early in the year

why does it matter

Stubbornly high inflation has pushed many consumers across the continent into a cost-of-living crisis, causing them to cut back dramatically on spending during this period. Spending in the eurozone fell 0.3 percent in the first three months of this year after falling 1 percent in the previous quarter. Imports also fell sharply as demand for goods and services contracted.

Public spending, which rose during pandemic lockdowns, also recorded a sharp decline, contracting in the first quarter by 1.6 percent from the previous year.

The downturn mirrored one in Germany, the euro zone’s largest economy, which last month reported that data from the first three months of the year showed its economy had fallen into recession amid an energy price shock.

But Thursday’s report showed mixed performance across the region, with southern European economies including Spain, Italy and Portugal posting strong growth rates, while Germany and the Netherlands contracted and France grew only moderately.

Since the spring, Europe’s macroeconomic pace has accelerated slightly, and the European Commission has raised its growth forecasts, forecasting an expansion of 1.1 percent this year and 1.6 percent in 2024.

“Looking ahead, we think that consumer spending is now picking up slightly as inflation eases, and we also think that government spending will pick up,” Klaus Vestesen, chief eurozone economist at Pantheon Macroeconomics, wrote in a note. “But this consolidation is likely to be offset by a continued decline in investment, and a further decline in inventories, reflecting the tightening of credit standards.”

background

Governments had hoped to avoid a recession after spending lavishly during the winter months to protect households and businesses from soaring energy and food costs, exacerbated by Russia’s war in Ukraine. Across Europe, nations quickly stockpiled energy reserves, and mild winters, combined with mass conservation efforts, helped avert the worst.

The strategy helped lower energy prices, and inflation in the eurozone’s largest economies fell from record levels. In May, the annual rate of inflation was 6.1 percent, the lowest level in the eurozone in more than a year.

But food prices and a range of services continued to rise at an uncomfortable pace, raising the odds that the European Central Bank will continue to raise interest rates at its upcoming meetings. The International Monetary Fund has warned that the main challenge for European policymakers this year will be to rein in inflation without triggering a severe recession.

What then

Analysts said the slowdown was moderate and unlikely to affect the economic recovery from the pandemic, but nonetheless noted that growth will remain subdued for the rest of the year.

“It’s hard to argue that this is a recessionary environment,” ING Bank said in a note to clients. “The stagnation of the economy marks a definite break from the recent post-pandemic boom.”

The next monetary policy meeting of the European Central Bank is next Thursday.