The euro area economy is at risk of entering a recession later this year, as recent official data revealed a slight contraction in output during the third quarter. According to Eurostat, the European Union's statistics office, gross domestic product (GDP) in the 20 eurozone countries decreased by 0.1% in the July-to-September period compared to the previous three months.
The dip comes after a modest 0.2% increase in the April-to-June period and underscores the delicate balance between economic contraction and growth in the eurozone. The eurozone's GDP remained stagnant in the last three months of 2022 and the first quarter of this year.
According to Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, the overall scenario for the eurozone is one of struggle. The region has only experienced a 0.1% growth in the past year, and current business surveys consistently indicate a decline in activity at the beginning of the fourth quarter.
The economy, he added, will "remain sluggish" whether or not the eurozone suffers a technical recession, defined as two consecutive quarters of falling GDP.
Inflation continues to ease
In a positive turn of events, recent data revealed a decrease in inflation this month, with it dropping below 3% for the first time in over two years. According to Eurostat, consumer prices in the euro area rose by 2.9% in October compared to the previous year, a decline from September's rate of 4.3%.
"The decrease can primarily be attributed to the absence of the significant increase in energy and food prices that occurred in October 2022," explained Christoph Weil, a senior economist at Commerzbank in Germany.
Core inflation, excluding the unpredictable fluctuations of food and energy prices, declined to 4.2% from 4.5% in September. The reduction in inflation will be a relief for the European Central Bank, which has been raising interest rates for over a year in an effort to control soaring prices. Last week, the ECB opted to maintain rates at their current level, ending a streak of 10 consecutive rate hikes, as inflation demonstrates a significant decrease and the economy shows signs of weakening.
Eurozone set for stagnation
Following Russias full-scale invasion of Ukraine in February 2022, the euro area economy has faced significant challenges in regaining momentum. The surge in energy prices as a consequence of this event has had a particularly severe impact on Germany, the largest economy in the region. Given its substantial manufacturing sector and heavy reliance on Russian gas at the time, Germany was particularly vulnerable to the consequences of this crisis.
The interest rate hikes that followed, to tame soaring inflation, have further weighed on spending by consumers and businesses.
FILE - In Dortmund, Germany, on Sept. 28, 2023, people can be seen walking along the main shopping street. The persistent issue of inflation in Europe showed signs of improvement in September, raising optimism that consumers may soon experience relief from the rising prices of everyday expenses such as groceries, vacations, and haircuts. Additionally, this positive development may eliminate the need for the European Central Bank to impose further economic restrictions by increasing already-record high interest rates. (AP Photo/Martin Meissner, File)
Europe's largest economy contracted in the third quarter, indicating trouble for the region. According to recent survey data, both manufacturing and services sectors in the eurozone have been experiencing a continuous decline, and the demand for goods and services is expected to deteriorate further.
Economists predict that despite the region avoiding a recession, a significant recovery is still a distant prospect.
According to Rory Fennessy, an economist at Oxford Economics, the eurozone economy will experience a period of economic stagnation, as it continues to grapple with tight financial conditions, resulting in exceptionally weak momentum leading into the fourth quarter.
Official GDP data from Germany and France, the top two economies in Europe, reinforces this perspective. In the third quarter, French GDP only grew by 0.1% compared to the previous three months, where it surpassed economists' predictions and expanded by 0.6%. Conversely, output in Germany experienced a slight contraction during the same period.
Spain's economy experienced moderate growth in comparison to the previous quarter, whereas Italy remained stagnant. However, Ireland encountered a considerable decline of 1.8% in its volatile GDP, exacerbating the contraction of the euro area. It is possible that the region could have avoided a negative GDP figure otherwise.
"The current economic environment is experiencing a gradual decline, however, there is no immediate indication of a severe recession," commented Bert Colijn, a senior economist specializing in the eurozone at ING, a Dutch bank. "Nevertheless, persistent uncertainty surrounding economic and geopolitical factors, coupled with the effects of increased interest rates, will impede economic growth in the forthcoming quarters."
