The eurozone, consisting of 20 countries that use the euro as their currency, experienced a mild recession at the beginning of the year due to high inflation and government austerity measures. Revised official data released on Thursday revealed that economic output in the eurozone declined by 0.1% in the first quarter, following a similar dip in the fourth quarter of the previous year. A recession is typically defined as two consecutive quarters of economic contraction.
In contrast, the broader European economy, including countries outside the eurozone, managed to avoid a downturn. The gross domestic product (GDP) of the European Union increased by 0.1% in the first quarter after a 0.2% decline in the previous quarter.
Andrew Kenningham, Chief Europe Economist at Capital Economics, noted that high prices and rising interest rates had significantly impacted household consumption in the eurozone. However, considering the magnitude of the income shock once adjusted for inflation, the situation could have been worse, as stated by Frederik Ducrozet, Head of Macroeconomic Research at Pictet Wealth Management, in a tweet.
Inflation in the eurozone soared last year due to Russia’s invasion of Ukraine, which led to a sharp increase in energy prices. Although inflation has moderated, it remains high, with consumer prices in May being 6.1% higher compared to the previous year.
A significant reduction in government spending also contributed to the decline in GDP during the early months of the year.
In comparison to the United States, both the eurozone and the EU as a whole are now lagging behind in economic performance. The US GDP grew by 0.3% in the first quarter, following a 0.6% increase in the previous quarter, according to data from the Organisation for Economic Co-operation and Development. On an annualized basis, which is favored in the US, the economy grew by 1.3% in the January-March period compared to the previous quarter.
Initial estimates had suggested a slight increase in economic output for the eurozone in the first quarter. However, the downward revision of Thursday’s data was primarily due to downgrades in Germany, the largest economy in Europe, and Ireland, according to Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics. Germany’s GDP contracted by 0.3% in the first quarter, compared to an earlier estimate of zero growth, mainly as a result of the energy price shock experienced last year and its impact on consumer spending.
The evidence of a recession in the eurozone poses a challenge for the European Central Bank (ECB) as it prepares to meet next week to determine interest rates. Inflation in the eurozone remains more than three times the target set by the ECB, but further rate hikes to address it could harm the economy.
Andrew Kenningham from Capital Economics predicts that GDP is likely to contract again in the second quarter as the effects of monetary policy tightening continue to impact the economy.