Importance of the Situation
Consumer prices remained high, leading to a cost-of-living crisis across the continent and causing many to pull back on spending during the period. Spending in the Eurozone dropped by 0.3 percent in the first quarter of the year, after decreasing by 1 percent in the previous quarter. Import numbers also declined, as the demand for goods and services shrunk.
Public spending, which had surged during the pandemic lockdowns, also slumped significantly, contracting by 1.6 percent from the previous year’s first quarter.
The downturn appears to resemble a decline in Germany, the Eurozone’s largest economy, which reported last month that its economy had slipped into a recession following the energy price shock witnessed in the first three months of the year.
However, the figures published on Thursday revealed a mixed performance across the region, with Southern European states such as Spain, Italy, and Portugal all posting solid growth rates, while Germany and the Netherlands declined, and France only recorded a mild expansion.
Since spring, the overall economy in Europe has picked up slightly, and the European Commission has improved its growth forecast, predicting expansion of 1.1 percent this year and 1.6 percent in 2024.
According to Claus Vistesen, chief economist for the Eurozone at Pantheon Macroeconomics, “We believe that customer spending is now rebounding slightly as inflation eases, and we expect government spending to recover. But this boost is likely to be offset by a worsening decline in investment and a further reduction in inventories due to tighter credit standards.”
Background
Governments had hoped to stave off a recession by spending lavishly during the winter to protect households and businesses from soaring energy and food prices, which were exacerbated by Russia’s war in Ukraine. Across Europe, countries quickly stockpiled energy reserves, and a mild winter, combined with widespread conservation efforts, helped avoid the worst of it.
The strategy served to bring down energy costs, and inflation in the Eurozone’s largest economies eased from record highs. The annual inflation rate in May was 6.1 percent, the lowest it has been in over a year.
However, the price of food and various services has continued to rise uncomfortably, increasing the likelihood that the European Central Bank would continue raising interest rates at its upcoming meetings. The International Monetary Fund has warned that the main challenge for European policymakers this year would be to curb inflation without causing a severe recession.
What Can Be Expected Next
While the slump was minor and not expected to impede the economic recovery from the pandemic, analysts have stated that growth will remain sluggish for the rest of the year.
“It’s difficult to argue that this is a recessionary environment,” ING Bank remarked in a note to its clients. “However, the stagnation of the economy does mark a clear distinction from the recent post-pandemic surge.”
The European Central Bank’s next monetary policy meeting is scheduled for June 15th.
