Eurozone economy grows unexpectedly in Q4, but a weak 2023 looms

  • GDP grows by 0.1% in the 4th quarter
  • Growth in 2023 is expected to be weak
  • Inflation, energy prices put pressure on incomes
  • ECB interest rate hikes show effect

FRANKFURT, Jan 31 (Reuters) – The euro zone grew in the final three months of 2022 and managed to avoid a recession even as soaring energy costs, waning confidence and rising interest rates took a toll on the economy, which is likely to continue into this year.

Gross domestic product across the currency bloc grew a paltry 0.1% in the fourth quarter, Eurostat data showed on Tuesday, beating 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 eurozone countries, Germany and Italy registered negative growth rates in 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 eurozone, which now spans 350 million people in 20 countries, given some members’ heavy reliance on cheap energy.

Rising oil and gas prices have depleted savings and held back investment, while forcing the European Central Bank to raise interest rates on an unprecedented scale to stem inflation.

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But the economy has also shown some unexpected resilience – as during the COVID-19 pandemic, when growth exceeded expectations as businesses adapted to changing circumstances more quickly than policymakers had predicted.

Recent figures as a decisive confidence indicator or the latest PMI data suggest that growth may have already bottomed out and that a slow recovery is on the way, helped by generous government support and a mild winter that has limited energy use.

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

However, the overall picture remains weak with modest growth forecasts for 2023 due to a large decline in real incomes and rising interest rates.

“The headline GDP figure gives a misleadingly favorable impression of economic conditions at the end of 2022,” said Ken Wattret, analyst at S&P Global Market Intelligence.

“The key takeaway from the member states’ data is the breadth of the weakness in private consumption, with the acute pressure on household real incomes due to rising inflation delayed.”

Ireland’s 3.5% fourth-quarter growth figure distorted the overall picture as it was largely driven by activity among large foreign companies based there for tax reasons, economists said, adding that without Ireland, eurozone growth would have been zero.

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

Such a rapid rise puts one brake on bank lendingan important source of credit for businesses, and access to loans has already suffered biggest drop last quarter since the bloc’s debt crisis in 2011.

“In the coming months, the noticeable tightening of monetary policy will increasingly slow 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 expected recovery in the second half is likely to be weak.”

Reporting by Balazs Koranyi; Editing by Catherine Evans

Our standards: Thomson Reuters Trust Principles.

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