EBN- Europe faced economic stagnation at the close of 2023, extending a year-long struggle amidst challenges such as higher energy prices, more expensive credit, and a downturn in the former economic powerhouse, Germany.
The data released by the EU statistics agency Eurostat on Tuesday revealed zero economic growth for the October-to-December period, following a 0.1% contraction in the preceding three months.
This dismal trend continued for the 20 countries using the euro currency, showing no significant growth since Q3 2022 when the economy grew by a mere 0.5%.
The outlook for the current year doesn’t look promising either, with business activity indicators signaling contraction. Disruptions to shipping in the Red Sea have constrained global trade through the Suez Canal, leading to increased shipping costs and a potential threat to inflation.
These figures underscore the widening gap between Europe and the United States. The U.S. economy grew by 0.8% in Q4 compared to the previous three months, with an annual pace of 3.3%, exceeding expectations.
While the eurozone only grew by 0.5% for the full year, the U.S. recorded a growth of 2.5%. The International Monetary Fund downgraded expectations for the eurozone to a meager 0.9% expansion, forecasting global growth of 3.1% led by the U.S.
According to Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, the big picture is that eurozone GDP has remained flat since Q3 2022 due to surging gas prices and the European Central Bank’s decision to raise interest rates.
Despite the economic challenges, not all news is bad. Unemployment is at record lows, and job numbers rose in the July-to-September quarter. Energy prices have decreased from recent spikes, though still higher post-Russia’s invasion of Ukraine.
While inflation has rapidly declined from its double-digit peak to 2.9% in December, people’s pay and purchasing power are still recovering from the price surge.
In France, farmers pushing for better pay, fewer constraints, and lower costs have set up barricades around Paris this week.
Meanwhile, the European Central Bank’s anti-inflation measures, including sharply higher interest rates, have curbed business investment and real estate activity like construction and home sales.
Germany, Europe’s largest economy, shrank by 0.3% in Q4, marking one of the worst-performing major developed economies in the last year. Issues such as higher fuel prices, a cut-off of natural gas from Russia, a lack of skilled workers, and underinvestment in infrastructure contribute to Germany’s economic challenges.
While incoming numbers for Europe don’t indicate a significant improvement and could signal a slight contraction in the first three months of this year, the eurozone is expected to benefit from falling inflation, restoring consumer purchasing power, and anticipated lower interest rates, according to economists at Oxford Economics.
Some analysts expect the European Central Bank to cut interest rates as early as April, while others think the central bank may wait until June to ensure inflation is under control.
Despite these potential improvements, risks remain, including attacks by Yemen’s Houthi rebels on ships in the Red Sea, constituting 12% of global trade, amid Israel’s war on Hamas.
Transport costs have risen as shipping companies reroute vessels around the southern tip of Africa, adding a week or more to voyages. Higher shipping costs and delays to various products raise concerns about new consumer price spikes if the conflict in Gaza drags on or escalates.
The trade disruption could add as much as 0.5% to core inflation, excluding volatile fuel and food prices, according to Oxford Economics. Core inflation is closely monitored by the European Central Bank, and analysts at Oxford Economics suggest that the impact on core inflation might be enough for the ECB to delay lower rates until June.”
