Europe's Economy Improves, Raising Hopes That Global Recession Threat Is Receding

After a period of decline in the second half of last year, business activity in the eurozone rose again in January. This increase raises the likelihood that the global economy will avoid a recession in 2020, according to economists.

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The unexpectedly upbeat surveys suggest that while the global economy could slow this year under pressure from high prices and interest rates, a recession appears less likely thanks to the receding threat of energy shortages in Europe and China’s postpandemic reopening. These positive developments suggest that the global economy may be able to weather the challenges it faces in the coming year.

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Most economists had previously predicted that the eurozone would enter a recession this quarter, after its economy contracted in the last three months of 2022. However, recent developments have led many to reconsider this forecast.

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Despite the challenges posed by the pandemic, the economy in the region has been surprisingly resilient. This is due in part to a mild winter, as well as efforts by businesses and households to reduce energy consumption. Additionally, governments have been working to find new natural gas suppliers, and there has been billions of euros in fiscal support.

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S&P Global's composite output index for the eurozone rose to 50.2 in January, indicating an expansion in business activity. The index had been at 49.3 in December. A reading above 50 points to an expansion in activity, while a reading below that level points to a contraction. According to Chris Williamson, chief business economist at S&P Global Market Intelligence, the eurozone economy appears to be stabilizing, which could mean that the region will avoid a recession. The reopening of the Chinese economy has helped to boost confidence in the global economic outlook for 2023, resulting in increased optimism among businesses.

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A separate survey released by the European Commission on Monday showed that consumer confidence in the eurozone rose for the fourth consecutive month in January. This follows a record low in September. Households are still gloomy, but not as pessimistic as they were when energy rationing was a threat. Businesses have also become less downbeat about their prospects over recent months.

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According to Holger Schmieding, an economist at Germany’s Berenberg Bank, if households and businesses are afraid of the future, they will hold back on spending. However, if they expect better times to come, they will be more likely to look past temporary shocks and continue spending. Both households and companies have the means to do this.

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In contrast, the composite output index for the UK fell to 47.8 in January, from 49.0, reaching a two-year low. This suggests that the country's economy may lag behind other parts of Europe, as businesses grapple with a shortage of workers, the impact of interest-rate rises by the Bank of England that started at the end of 2021, and the continuing drag on business investment caused by its exit from the European Union.

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In early December, China lifted many of its zero-tolerance pandemic controls in an abrupt change of course. While this led to an increase in infections and deaths, it also opened the door to a sharp economic rebound in the world’s second-largest economy. China’s economy suffered its weakest expansion in four decades in 2022, but the lifting of pandemic controls has allowed for a significant rebound.

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In addition to the uptick in Chinese activity, signs of a strengthening eurozone are helping to ease fears of a global recession. A recession is typically defined as a period of declining economic output. Investec economists have raised their forecast for global economic growth this year to 2.4% from 2.2%, citing the relaxation of China's strict zero-Covid policy and the warmer weather in Europe as positive factors.

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The World Bank estimates that global output will expand by 2.9% in 2022, which would mark a slowdown from the previous year but would still be much stronger than the Bank's own forecast of 1.7%. With the outlook for both the eurozone and China improving over recent weeks, growth forecasts have been unusually changeable and varied at the start of this year.

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While the global economy has shown some improvement in recent weeks, there are still some potential risks that could lead to a recession. One of the biggest uncertainties is how central banks will respond to inflation rates beginning to decline in 2022. If interest rates are raised too high, it could put a strain on the economy and push it into recession.

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According to surveys of eurozone purchasing managers, price pressures continued to ease in January, with business costs rising at the slowest pace since April 2021. The eurozone's annual rate of consumer-price inflation fell for the second straight month in December, and further declines are expected this year.
However, China's reopening could lead to increased prices, and the European Central Bank has indicated that it plans to raise interest rates further. Since July, the ECB has raised rates by 2.5 percentage points, the fastest pace in its history.

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ECB President Christine Lagarde said in a speech Monday that ECB interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive, and stay at those levels for as long as necessary.