Euro zone economy expands in fourth quarter, easing recession fears

The euro zone posted positive growth in the final quarter of 2022, beating expectations and reducing fears of a potential regional recession. This is good news for the region, which has been struggling economically in recent years.

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Preliminary data from Eurostat showed that the euro zone economy expanded by 0.1% in the fourth quarter. This was contrary to what economists had expected, which was a 0.1% contraction. The most recent figures show that the euro area posted a 0.3% GDP increase for the third quarter of last year. This is a positive sign for the economy, and it is hoped that this trend will continue in the future.

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The region has been under significant pressure since Russia's invasion of Ukraine, as high food and energy prices have compounded long-standing supply chain bottlenecks. Last year, economists warned that the 20-member region could be about to enter an economic recession. Energy prices began to decline in the latter part of 2022, providing some relief to the euro zone’s broader economic performance. The euro zone is expected to see growth of 1.9% in the fourth quarter of 2021, compared to the same period in 2020, according to preliminary data. This would mark a continuation of the positive trend seen in the third quarter, when the euro zone economy grew by 0.4%.

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"The advance euro zone GDP report shows that economic growth slowed in the fourth quarter but didn't fall outright, which is different from what the business surveys are saying," Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said in an email to clients.

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However, Germany's economy unexpectedly contracted by 0.2% in the last quarter of 2022, leading analysts to believe that the country will enter a recession.
According to Salomon Fiedler, an economist at Berenberg, Germany is likely to enter a short and shallow recession in the fourth quarter of this year. This recession is expected to last through the first quarter of next year, after which the economy is expected to stabilize in the second quarter.

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Italy, the region’s third largest economy, reported negative growth in the fourth quarter, down by 0.1%. Rome and Berlin have some of the strongest links to Russian gas.
According to Debono from Pantheon Macroeconomics, the data from today suggests that the euro zone likely avoided entering a technical recession this quarter. This will give the ECB the confidence to continue on its path of tight monetary policy in order to fight inflation.

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The European Central Bank (ECB) is scheduled to meet on Thursday to discuss its next monetary policy steps. According to surveys of economists conducted by Reuters and Factset, the bank is expected to agree to a 50 basis point increase in interest rates, which would take the main rate to 2.5%.
Market participants will be closely monitoring ECB President Christine Lagarde for clues on how many more interest rate hikes might occur in the coming months.
Some economists argue that the euro zone is still at risk of entering a recession later this year.

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Looking ahead, we think the euro-zone (excluding Ireland) will fall into recession in the first half of this year as the effects of the ECB’s policy tightening intensify, households struggle with the cost of living crisis and external demand remains sluggish,” said Andrew Kenningham, chief Europe economist at Capital Economics, in an email Tuesday.

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However, this will not dissuade the ECB from its plans to raise rates further, including by 50 basis points on Thursday.