Euro Zone Economy Maintains Stability in Q4 2023, Escaping Predicted Recession

Flash figures released by the European Union’s statistics agency indicate that the euro zone economy showed signs of stabilization in the fourth quarter of 2023. Contrary to expectations of a shallow recession, the bloc avoided contraction, following a 0.1% GDP decline in the third quarter.

The seasonally adjusted GDP for the euro zone remained unchanged compared to the previous quarter and showed a 0.1% expansion compared to the previous year. Preliminary estimates suggested a 0.5% growth for the entire year of 2023. Germany, the largest economy in the euro zone, reported a 0.3% contraction in the final quarter, narrowly avoiding a technical recession due to an upward revision in the third-quarter reading, where the economy stagnated.

France’s economy remained steady in the fourth quarter, while Spain surpassed expectations with a 0.6% expansion.

The European Commission’s euro zone sentiment indicator reported a decline in consumer confidence, although the outlook for businesses in services and industrials showed slight improvement.

Bert Colijn, senior economist at ING, noted that the euro zone is experiencing a “phase of prolonged weakness,” primarily driven by Germany. He explained that Germany is grappling with weak global demand for goods, and its heavy industry is facing challenges due to higher energy prices.

Colijn pointed out a growing divergence between the euro zone and the U.S., attributing it partly to a more substantial decline in inflation-adjusted wages, impacts of energy prices on industrials, and lower levels of fiscal support.

The euro, in response to the Tuesday data, continued to register modest losses against the U.S. dollar and marginal gains against the British pound. In contrast, the U.S. economy exceeded expectations by expanding by 3.3% in the fourth quarter. U.K. figures are anticipated in mid-February.

Over the past year and a half, the European Central Bank has raised interest rates to record highs, contributing to tighter financial conditions across the region. This has helped temper inflation from its peak of 10.6% in October 2022 to 2.9% in December. The latest euro zone inflation figures are scheduled for release on Thursday.

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