After a succession of crises, investors, economists and policymakers are reaching for the better places in the European economy: a few weeks of warmer winter weather, lower natural gas pricesand a rebound in German investor sentiment.
Just a few months ago, governments were planning power cuts and gas rationing on the continent facing the winter without Russian gas. Now headline inflation appears to be at or past its peak and consumers have proved surprisingly resilient in the economic turmoil.
“The big picture is less bad than we thought a few months ago,” says Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. The worst risks are “a very serious recession, especially winter energy rationing, which has been removed,” he said.
The threat of a recession has passed for the time being. The eurozone economy grew by 0.1 percent quarter-on-quarter in the last quarter of 2022, according to the region’s statistics office’s first estimate released Tuesday.
The latest data came hours after the International Monetary Fund raised its forecast for eurozone economic growth to 0.7 percent in 2023, from a forecast of 0.5 percent made in October. The small increase came as the economy performed better than expected last year, helped by lower natural gas prices and government financial support to protect households from some of the increase in energy costs.
It was another small piece of good economic news to add to a modest heap. Already this month, the ZEW index of German investor sentiment turned positive for the first time since February 2022, before the war in Ukraine, and a measure of economic activity in the Eurozone, the composite purchasing managers index, indicated that the economy grew in January .
“The news has become much more positive in recent weeks,” Christine Lagarde, the president of the European Central Bank, said earlier this month at the annual meeting of the World Economic Forum in Davos, Switzerland.
The conversation has shifted, she said, from expectations of a recession to, in some major economies, just a small economic contraction. However, she said the Eurozone economy would slow significantly in 2023 from the previous year, adding: “It’s not a brilliant year, but it’s a lot better than we feared.”
But with the war in Ukraine raging, optimism about the European economy is extremely fragile.
The past year has been a “lesson in humility” when it comes to economic forecasting, said Mr. Ducrozet. He added that, looking at the data so far this year, “it doesn’t look that bad, but it doesn’t look good either..”
On Monday, Germany reported that its economy contracted unexpectedly in the fourth quarter, putting Europe’s largest economy at risk of recession.
This shows that “if there’s a risk, that’s still the downside,” said Mr. Ducrozet. “Consumers were hit by the biggest shock to real incomes since World War II because of this rise in inflation.”
This appears to be particularly the case in Britain, where data earlier this month showed the economy fared better than expected in November, growing 0.1 percent from the previous month. This means the country is likely to avoid an economic contraction in the fourth quarter, averting a recession.
But that’s just for the moment. The outlook in Britain is particularly poor and the IMF has downgraded its forecast for the economy, forecasting a 0.6 percent decline in 2023 instead of 0.3 percent growth, citing tight fiscal policy , higher interest rates and high household energy bills.