Eurozone Avoids Recession as Inflation Edges Down and Gas Price Surge Abates

The European Commission has said that the eurozone will avoid a recession this year as the inflation is easing and gas prices remain low. Eurostat data shows the 19 countries in the eurozone posted a cumulative economic growth of 0.1 percent in the fourth quarter of 2022 compared with the previous quarter.

Paolo Gentiloni, European Commissioner for the economy, said the 'ominous messages of stagflation, deep recession and blackouts", which hogged the headlines in 2022 have been "contradicted by reality."

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However, six eurozone countries including large economies like Germany and Italy reported negative economic growth in the fourth quarter of 2022. While the German economy declined by 0.2 percent and Italy's economy shrank by 0.1 percent.

There were serious concerns about a European recession as economies in the region were hammered by rising inflation, and high energy prices in the aftermath of the Russian war in Ukraine. However, the worst is over, according to the European Commission, which now says the EU as a whole will post a growth rate of 0.8 percent in 2023.

"Better than expected doesn't mean good and the outlook is of course policy-dependent ... Europeans still face a difficult period ahead, with growth still expected to (be) slow and inflation set to relinquish its grip on purchasing power only gradually," said Gentiloni, the European Commissioner for the economy, according to Euro News.

European Central Bank
European Central Bank Wikimedia Commons

A sustained decrease in inflation is the key driver that will nurse the economies back into health this year, according to Eurozone economists. Eurozone inflation is projected to drop to 5.6 percent in 2023 and to 2.5 percent in 2024, according to the European Central Bank. The ECB's annual target rate is 2 percent.

An economic recession is defined as two consecutive quarters of negative gross domestic product (GDP) growth. As per forecasts, the European economies will avoid falling into the technical recession as they are expected to pick up steam in the second quarter of 2022.

ECB's rate hikes as part of the drive to rein in inflation had also fueled fears of a recession.The European Central Bank has raised benchmark rates by 2.5 percentage points in the battle against inflation so far. Moreover, it has already suggested that it will likely raise rates by 50 basis points in February and March. The ECB's objective is to get inflation back to 2 percent from the 10 percent levels currently.

We must stay the course in our battle against inflation; it's not yet won," French central bank chief Francois Villeroy de Galhau said at a World Economic Forum (WEF) panel discussion in Davos last month.