The eurozone economy was on track to avoid recession after the fourth quarter of 2022, but expectations of higher interest rates from the European Central Bank in the months to come still pose a risk to growth in Europe.
Gross domestic product (GDP) in the eurozone—the majority of members in the European Union using the euro—grew at 0.1% on a quarterly basis in the final three months of 2022. Eking out a quarter of economic expansion, fourth-quarter GDP beat expectations of a 0.1% decline among economists surveyed by FactSet and built on growth in each prior quarter of 2022.
It puts the core of the European economy on the path to dodge a recession after a painful year. In 2022 there were soaring energy prices after Russia’s invasion of Ukraine, and a dramatic rise in borrowing costs as the European Central Bank (ECB), like the Federal Reserve, ratcheted up interest rates in a bid to tame red-hot inflation.
But the stock market reaction was muted, with the pan-European Stoxx 600 index down 0.8%.
Risks to growth remain for Europe, with investors fully anticipating a 50 basis-points interest-rate hike from the ECB on Thursday as inflation remains salient across the region. Traders are also positioning for more hawkishness from the central bank this week, including signs that financial conditions will continue to tighten in 2023.
The full effects of higher interest rates can take many months to ripple through the economy, so the eurozone will face pressures from higher borrowing costs in the months to come. While energy prices have fallen amid a mild winter and buildup of gas supplies—helping growth prospects—Europe is not yet out of the woods.
“Yes, the eurozone economy could still slip into a much-predicted recession, but it is likely to be milder than originally feared,” said Charalampos Pissouros, an analyst at broker XM. “Combined with another acceleration in the euro area’s underlying inflation on Wednesday, this is likely to keep expectations of a hawkish ECB elevated.”
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