Europe’s economy ticks up in the first quarter but worries linger

By Julia Horowitz, CNN

Europe’s economy avoided a recession over the winter, picking up pace slightly in the first quarter of 2023 despite Russia’s war in Ukraine and sizable interest rate hikes aimed at fighting inflation.

Economic output in the European Union rose 0.3% in the first three months of 2023 compared with the previous quarter, according to an initial estimate of gross domestic product released Friday. Among the 20 countries that use the euro, output increased 0.1%.

During the last three months of 2022, GDP — the broadest measure of an economy’s health — fell 0.1% in the European Union and was flat in the euro zone.

The latest numbers mean the region narrowly dodged a recession, which is technically defined as two consecutive quarters of economic contraction.

Yet economists and investors are warning that Europe is not out of the woods. They expect that economic activity will be hit hard later this year as the run-up in borrowing costs dampens households’ and businesses’ appetite for credit and weakens consumer demand. There are also concerns that tumult in the global banking sector could make it harder to access loans.

“We consider it unlikely that this marks the beginning of a sustained economic revival,” Christoph Weil, a senior economist at Germany’s Commerzbank, said in a note to clients. “In the second half of the year the massive rate hikes by central banks worldwide are likely to apply the brake on growth.”

Threat persists

The European Commission, the European Union’s executive arm, forecast in November that both the bloc and the euro zone would enter a technical recession over the winter, and that growth wouldn’t return until the spring.

But unseasonably warm weather and a pullback in energy prices provided some relief. The reopening of China’s economy late last year has also been beneficial, since many European businesses are big exporters to the country.

Economists are holding back cheers, however. Carsten Brzeski, global head of macroeconomics at ING, a Dutch bank, told CNN that signs of economic “divergence” between countries were worrying.

Germany, the European Union’s largest economy, stagnated during the first three months of this year. France, for its part, saw output expand 0.2%, while in Spain and Italy GDP grew 0.5% quarter-over-quarter. In Portugal, it rose 1.6%.

Looking ahead, demand for goods and services across the region is expected to dwindle as higher interest rates gradually feed through to the real economy.

“There is always a delay in impact from monetary tightening,” Brzeski said, noting that the effects would become clearer in the second half of 2023.

On Friday, the International Monetary Fund called on the European Central Bank to keep raising interest rates until the middle of 2024 to fight persistent inflation, Reuters reported.

If rates are pushed higher for longer, that would take a toll on the region’s economy.

“Even as Europe recovers from the energy crisis, the tighter monetary policy which has followed hard on its heels will weigh on investment and consumption,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a research note. “We expect any growth to be feeble and still see a significant risk of recession.”

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