Eurozone set to avoid recession this year as economist gloom lifts

The eurozone will avoid a recession this year according to a widely watched survey of economists that illustrates the sharp turnaround in global economic sentiment over the past two weeks.

As recently as last month, analysts polled by Consensus Economics predicted the bloc would plunge into recession this year. But this month’s survey found that they now expect it to grow by 0.1% during 2023. This is due to lower energy prices, the exceptional government support and the earlier than expected reopening of the Chinese economy, which is set to boost global demand.

The upgrade comes after officials and business leaders at this week’s annual World Economic Forum in Davos also adopted a more upbeat outlook, and the IMF signaled it would soon update its global growth forecast. .

Economists feared Europe could be among the hardest hit regions of the global economy this year due to its exposure to the economic consequences of Russia’s war with Ukraine. Just a few weeks ago, IMF Managing Director Kristalina Georgieva said that “half of the European Union will be in recession” by 2023.

Carsten Brzeski, head of macroeconomic research at ING Bank, described the reversal in economists’ forecasts as “a recession that never happened”.

Susannah Streeter, an analyst at Hargreaves Lansdown, said: “The dreaded energy crisis threat [is] retirement and inflation [is] back down faster than expected.

“Our perceptions have changed dramatically since October,” said Andrew Kenningham, chief European economist at Capital Economics, adding that government support had been more generous than expected, while the auto sector rebounded stronger than expected.

According to Anna Titareva, an economist at UBS, there is now less than a 30% chance of a recession, down from 90% last summer. She said easing supply chain disruptions, a strong labor market and excess savings explain the eurozone’s economic resilience, and that Europe has managed to fill its gas storage in recent months, which has greatly reduced fears of gas rationing.

The recent sharp drop in wholesale gas prices, which are back to levels last seen before Russia’s invasion of Ukraine, has also helped improve the economic outlook. JPMorgan this week raised its forecast for eurozone GDP for 2023 to 0.5% after anticipating natural gas prices to be around €76 per megawatt-hour, down from its previous expectation of €155.

Line chart of the index, 2015=100 showing Eurozone industrial production held up despite soaring gas prices

Speaking in Davos this week, Christine Lagarde, president of the European Central Bank, said economic forecasts were looking “much better” than feared. Gita Gopinath, deputy managing director of the IMF, said China’s decision last month to ease Covid-19 restrictions was one reason the fund had become more optimistic.

Sven Jari Stehn, an economist at Goldman Sachs, said firmer demand in China would “dramatically boost European trade, especially in Germany.”

German Chancellor Olaf Scholz said this week he was “convinced” that Europe’s biggest economy would not fall into recession. Banque de France Governor Francois Villeroy de Galhau said: “For Europe, we need to avoid a recession this year, which I wouldn’t have said with such confidence three months ago.”

Some economists still expect a recession. Silvia Ardagna, an economist at Barclays Bank, said that while the downturn would not be as deep as previously thought, the euro zone economy would still contract for two successive quarters, meeting the technical definition of a recession.

Kenningham warned that aggressive rate hikes by the ECB could lead to a weak recovery.

Lagarde signaled in Davos that the ECB would raise rates by 50 basis points at its February and March meetings. The deposit rate has already risen by 2.5 percentage points to 2% since June last year, a rate of tightening that eurozone economies have never seen before.

“The eurozone economy may avoid a recession, but interest rates may need to stay high for an extended period,” Kenningham said. “It looks like we could have – at worst – a mild recession, but that will be followed by a weak recovery.”

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