Eurozone Economy Flatlines, Widening the Gap With the U.S.

Eurozone Economy Flatlines, Widening the Gap With the U.S.

The eurozone economy stagnated late last year as a lingering energy crisis sparked a loss of competitiveness in some European industries, and consumers reined in spending to grapple with high living costs, Europe’s statistics agency reported Tuesday.

But economists believe the worst may be over, as the European Central Bank continues its campaign to wring out inflation without plunging the eurozone economy into a deep downturn.

Economic output in the 20 countries that use the euro currency grew at zero percent in the last three months of 2023 versus the previous quarter, after contracting in the third quarter, narrowly avoiding a recession. Compared with a year earlier, the eurozone grew just 0.1 percent.

The anemic pace is keeping Europe far behind the United States, where the economy, although slowing from a breakneck growth pace, continues to be powered by consumer spending. Aggressive interest rate increases by the Federal Reserve have brought a slowdown in inflation, and the Fed is expected to begin unwinding those increases soon.

“The gap in economic activity between the U.S. and eurozone is widening significantly at the moment,” said Bert Colijn, chief eurozone economist at ING Bank. “We only expect a material improvement in the eurozone economy much later in the year.”

Dragging Europe down is a loss of competitiveness on the back of structural changes since the war in Ukraine and energy crisis, he said. The problem is stark in Germany, whose powerhouse manufacturing sector has slumped, turning Europe’s biggest economy into an albatross for the region. The country is unlikely to emerge from the downturn any time soon, economists say.

European businesses have been raising wages, but at a slow pace that has kept consumers saving rather than spending. While the rapid rise in prices for everything from bread to gas has cooled, it’s not yet enough to fully reduce the pain for households, while wage increases have added to manufacturers’ costs.

In its latest economic outlook, released Tuesday, the International Monetary Fund cited “notably subdued” growth in Europe, reflecting “weak consumer sentiment, the lingering effects of high energy prices, and weakness in interest-rate-sensitive manufacturing and business investment.” It forecast growth in the eurozone to rise only 0.9 percent this year.

That has turned up the challenges facing policymakers at the E.C.B., who, like the Fed, had ratcheted up interest rates to curb the rise in prices before recently pausing their campaign. There are signs that the E.C.B.’s tactics have succeeded in not pushing the economy off a cliff, as economists had feared, but are rather starting to pave the way for a modest recovery. Investors expect the central bank to start cutting rates as early as April, a move that could unlock more economic activity.

Rory Fennessy, Europe economist at Oxford Economics in London, said that while any pickup would be gradual, “we anticipate fading headwinds in Europe to support a recovery in growth throughout 2024.”

The strength of any bounce may depend heavily on Germany’s fortunes. The German economy shrank 0.3 percent in the fourth quarter, after flatlining in the previous two quarters, keeping it in a “twilight zone between recession and stagnation,” said Carsten Brzeski, the head of global head of macroeconomics at ING.

France, the bloc’s second-biggest economy, failed to expand in the fourth quarter amid a fall in consumption and slowdown in investment. The government has increased the minimum wage eight times since 2021 to help workers combat a cost-of-living crisis, but many people still feel they are falling behind. Irate farmers have blockaded the country in the last week, in part to air grievances over low wages and declining livelihoods brought on by inflation.

Growth has been more robust in major countries along Europe’s southern rim, including Spain and Portugal, revealing a European economy that appears increasingly to be operating at two speeds. The Spanish economy grew 0.6 percent from October to December, driven by a tourism boom, while Portugal’s expanded 0.8 percent.

Economists see more signs of a potential recovery emerging in the coming months. The prospect of a possible interest rate cut by the E.C.B. could stimulate lending to manufacturing and stoke more businesses investment, as well as a tepid revival in the European real estate markets, which slowed sharply last year.

And while wages have only started to recover, the prospect of a further decline in prices may get consumers to start spending more, pumping more money into the economy and helping to boost growth.

“A soft landing of the European economy remains the most likely scenario over the near term,” S&P Global ratings said in a recent research note.

Avatar photo

Kyle C. Garrison

Related Posts

Read also x