Eurozone set to avoid recession this year as economists’ gloom lifts

Christine Lagarde, European Central Bank president. said the economic prognosis was looking “a lot better” than feared. Photo / Getty Images

The eurozone will avoid a recession this year according to a widely-watched survey of economists which illustrates the sharp about-turn in global economic sentiment in the past couple of weeks.

As recently as last month, analysts surveyed by Consensus Economics were predicting the bloc would plunge into recession this year.

But this month’s survey found they now expect it to log growth of 0.1 per cent over the course of 2023. This is thanks to lower energy prices, bumper government support and the earlier-than-anticipated 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 embraced a more upbeat outlook, and the IMF signalled it would soon upgrade its forecasts for global growth.

Economists had feared Europe would be among the hardest-hit areas of the global economy this year due to its exposure to the economic consequences of Russia’s war with Ukraine. Just weeks ago IMF managing director Kristalina Georgieva said “half of the European Union will be in a recession” during 2023.

Carsten Brzeski, head of macro research at ING Bank, described the about-turn in economists’ forecasts as “a recession that never came”.

Susannah Streeter, analyst at Hargreaves Lansdown, said: “The threat of the feared energy crisis [is] retreating, and inflation [is] climbing down more rapidly than expected.”

“Our perceptions have changed quite radically since October,” said Andrew Kenningham, chief Europe economist at Capital Economics, adding government support had been more generous than expected, while the auto sector has rebounded more strongly than predicted.

There is now less than a 30 per cent chance of a recession, down from the an estimated 90 per cent last summer, according to Anna Titareva, economist at UBS.

She said the easing of supply chain disruptions, a strong labour market and excess savings explain the eurozone’s economic resilience, and Europe has been successful in filling its gas storage in recent months, which has greatly reduced fears of gas rationing.

The recent sharp fall in wholesale gas prices back to levels last seen before Russia’s invasion of Ukraine has also helped boost the economic outlook.

JPMorgan this week raised its 2023 eurozone GDP forecast to 0.5 per cent after anticipating natural gas prices would be about €76 (NZ$127) per megawatt hour, rather than its previous expectation of €155.

Speaking at Davos this week, European Central Bank president Christine Lagarde said the economic prognosis was looking “a lot better” than feared.

Gita Gopinath, the IMF’s deputy managing director, said China’s decision last month to ease Covid-19 restrictions was one reason why the fund had become more optimistic.

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

German chancellor Olaf Scholz said this week he was “convinced” Europe’s largest economy would not fall into a recession.

Banque de France governor François Villeroy de Galhau said: “For Europe, we should avoid a recession this year, which I wouldn’t have said with such confidence three months ago.”

Some economists do still expect a recession.

Silvia Ardagna, economist at Barclays Bank, said while the downturn would not be as deep as previously thought, the eurozone economy would still contract for two successive quarters — meeting the technical definition of a recession.

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

Lagarde signalled in Davos the ECB would raise rates by 50 basis points at its February and March meetings. The deposit rate has already increased by 2.5 percentage points to 2 per cent since June last year, a pace of tightening that eurozone economies have not experienced before.

“The eurozone economy may avoid a recession but interest rates may need to stay high for a prolonged period,” said Kenningham.

“It looks like we may get — at worst — a mild recession, but that will be followed by a weak recovery.”

Written by: Valentina Romei in London

© Financial Times