Euro Zone Unexpectedly Avoids Downturn But Struggles Persist

(Bloomberg) -- The euro zone unexpectedly avoided a first recession since the pandemic in the latter half of 2023 as firmer growth in Italy and Spain offset the malaise in Germany.

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Gross domestic product stagnated in the last three months of the year — dodging a two-quarter downturn once again by the slimmest of margins following the 0.1% decline between July and September.

Economists had anticipated another drop of that size as the 20-nation bloc navigates elevated interest rates, flimsy foreign demand and heightened geopolitical tensions. Its struggles aren’t going away, however.

Survey data suggest the start of 2024 was still relatively weak, especially as Germany — the region’s biggest economy — succumbs to a recession itself. While the overall picture is that of the soft landing the European Central Bank had been hoping for as it tackles inflation, there’s little prospect of imminent cuts in borrowing costs to perk up growth.

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Speaking after last week’s ECB policy meeting, where the deposit rate was left at a record-high 4%, President Christine Lagarde stood by earlier remarks pointing to a first reduction in the summer. Forward-looking service indicators signal “a pickup in further growth ahead,” she said.

What Bloomberg Economics Says...

“This is no doubt lackluster, but it’s not a collapse either. For the ECB, this should offer further confirmation that it can stay focused on its primary mission – guiding inflation sustainably back to its 2% target.”

—Maeva Cousin. For full REACT, click here

An index of economic sentiment barely shifted in January, though, according to separate data published Tuesday by the European Commission. A brighter mood in the industrial and services sectors was effectively canceled out by slumps in consumer and retail.

Fresh forecasts from the International Monetary Fund aren’t particularly upbeat about the euro area’s 2024 growth. Output is expected to expand by just 0.9% — down from an earlier forecast of 1.2%. That’s less than half the 2.1% projected for the US, which saw an upgrade.

“We do expect that the economy will pick up this year so that we have a modest rate of growth coupled with disinflation,” Governing Council member Boris Vujcic said Tuesday in Zagreb.

Here’s a look at the individual countries reporting Tuesday:

French GDP (7:30 a.m.)

France’s reading matched the estimate from analysts surveyed by Bloomberg. For the whole of 2023, GDP expanded 0.9%, according to statistics agency Insee, which also revised the third-quarter number up to zero from a 0.1% contraction previously.

The economy isn’t expected to stage a quick recovery in 2024 as manufacturers heal only slowly after a lengthy slump and households continue to feel the squeeze from inflation, even as it recedes.

The extended sluggish patch is a problem for Emmanuel Macron as his government relies on stronger expansion to repair public finances and restrain unemployment. A study by statistics agency Insee in December showed an uncharacteristically sharp acceleration would be needed to meet the forecast of 1.4% GDP growth that grounds the 2024 budget.

Macron also faces political difficulties as farmers prolong protests to demand more support and less bureaucracy from the state. He already replaced his prime minister this month in an effort to revive his presidency after a divisive debate over immigration.

Still, a separate publication from the statistics agency showed consumer spending was resilient in December with a 0.3% gain from the previous month. Economists had expected a stagnation after a 0.6% jump in November.

Consumer confidence has shown tentative signs of improvement. While still below its long-term average, the measure reached its highest level since February 2022.

Lithuania GDP (8 a.m.)

The economy shrank 0.3% in the fourth quarter after stagnating in the previous three months — dragged down by industry, wholesale, retail and transport.

The result comes despite the Baltic country boasting the European Union’s strongest consumer sentiment after inflation plummeted to just over 1% in December from 20% in early 2023.

Output is suffering from weaker demand in export markets, and while it’s expected to rise in 2024 as a whole, high financing costs and geopolitical uncertainty will weigh.

Bloomberg Economics on France (8:30 a.m.)

Economist Eleonora Mavroeidi:

“The French economy held up in the fourth quarter, but domestic demand slowed — both for household consumption and investment and for business investment. Overall, this suggests the economy is still struggling in the face of tight financing conditions. It also adds some modest downside risks to our forecast for growth to gather momentum in 1Q24.”

  • For full REACT, click here

Spain GDP, inflation (9 a.m.)

The economy expanded 0.6% in the fourth quarter — far above the 0.2% that was expected and driven largely by household consumption, according to state statistics agency INE. That pushed 2023 growth to 2.5%.

The country has been a recent outperformer among other large euro-zone nations, having suffered a deeper contraction than most during the pandemic. The government is looking to slowly phase out aid packages put in place after Russia’s war in Ukraine sent energy costs soaring. But it’s rolled over the bulk of them into 2024 as it continues to prop up the economy.

Separately, Spanish inflation unexpectedly quickened to 3.5% from a year ago in January — defying the 3% estimate in a Bloomberg survey of economists. This is the first early-year price data from a major euro-zone member and could dash hopes that December’s uptick was a oneoff.

Austria GDP (9 a.m.)

The country ended a six-month recession in the fourth quarter, when output rose 0.2%. Still, for 2023 as a whole GDP fell 0.7%.

“The domestic economy stabilized at a low level at the end of the year,” said the Wifo institute, which compiles the Austrian government’s statistics. “While the first signs of bottoming out can be seen in industry, the service sectors developed heterogeneously. Consumer and investment demand remained subdued.”

Czech Republic (9 a.m.)

Outside the euro zone, the Czech economy narrowly avoided a return to recession in the final quarter of last year, growing 0.2% from the previous three months. Preliminary data showed exports were the main driver, while domestic demand also rebounded, the statistics office said.

The government and the central bank forecast a moderate recovery this year as real-wage growth fuels private consumption. But lingering supply-chain disruptions continue to pose risks for key manufacturing industries relying heavily on imports of parts and materials.

Bloomberg Economics on Spain (9:58 a.m.)

Economist Ana Andrade:

“With government spending and inventories making large contributions to growth, the headline reading probably overstates the strength of underlying demand. Headline inflation ticked up in January in line with our forecast, reflecting the government’s decision to gradually reverse energy tax cuts.”

  • For full REACT, click here

Germany GDP (10 a.m.)

Europe’s largest economy has been flirting with recession for several quarters, but has managed to narrowly avoid one so far.

That could be about to change if momentum doesn’t pick up soon. Business surveys even signaled sentiment worsened slightly at the start of the year, and the Bundesbank has warned that output will “stagnate at best” in the first quarter.

That’s because foreign demand for German goods has shown few signs of a rebound, while consumers at home remain hesitant to spend money. Elevated sick leave is also holding back the economy.

GDP is likely to shrink by 0.2% between January and March, according to a projection Tuesday by the ifo Institute. “Companies in almost all sectors of the economy are complaining about falling demand,” forecasting chief Timo Wollmershaeuser said.

Italy GDP (10 a.m.)

GDP rose by 0.2% in the fourth quarter — beating economist expectations for stagnation thanks to the industrial and services sectors. In 2023, the economy expanded 0.7%.

Growth will probably slow a touch this year, with the central bank predicting it will come in at 0.6%. The impact of elevated ECB interest rates may test the country’s resilience, even after inflation plunged.

Bloomberg Economics on Germany (10:24 a.m.)

Economist Martin Ademmer:

“The deterioration in business sentiment at the beginning of the year suggests that Finance Minister Christian Lindner’s assessment of Germany as a tired but not sick man might prove overly optimistic. Moreover, sickness – in the literal sense – likely contributed to the economy’s weakness in past quarters.”

  • For full REACT, click here

Portugal GDP (10:30 a.m.)

Private consumption helped the economy expand 0.8% in the fourth quarter from the previous three months, when output fell 0.2%. Economists surveyed by Bloomberg had predicted growth of 0.3%. GDP advanced 2.3% in 2023.

The central bank in December cut its 2024 economic-growth forecast to 1.2%, citing a worse outlook for consumption and investment.

Bloomberg Economics on Italy (10:57 a.m.)

Economist Simona Delle Chiaie:

“Following the modest growth seen in the third quarter of 2023, Italy’s real GDP rose more than expected in 4Q23. The positive surprise was likely driven by a stronger-than-expected net export growth. Momentum, however, will likely remain weak due to tight credit conditions and sluggish manufacturing activity.”

  • For full REACT, click here

--With assistance from Peter Laca, Jana Randow, Rodrigo Orihuela, Alessandra Migliaccio, Joel Rinneby, Barbara Sladkowska, Ainhoa Goyeneche, Milda Seputyte, Marton Eder, Joao Lima and Giovanni Salzano.

(Updates with IMF, ECB official starting in seventh paragraph.)

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