Eurozone slipped into a mild recession early in the year

The eurozone slipped into a recession earlier this year amid the shock of high food and energy prices, Europe’s statistics agency reported Thursday. The shallow downturn reflected the challenges facing the European Central Bank as policymakers weigh how to continue curbing high prices without further damaging the economy.

Growth in the 20 nations that use the euro currency declined in the first three months of the year by 0.1%, revised data showed, following a fourth-quarter contraction of the same magnitude. It was the first six-month contraction in the eurozone since early in the coronavirus pandemic, creating what economists call a technical recession.

Stubbornly high inflation tipped many consumers across the continent into a cost-of-living crisis, prompting them to pull back considerably on spending during the period. Spending in the eurozone fell 0.3% in the first three months of this year after falling 1% in the previous quarter. Imports were also down sharply as demand for goods and services shrank.

Read | Eurozone GDP grows 0.1% in first three months of 2023

Public spending, which soared during the pandemic lockdowns, also posted a sharp decline, contracting in the first quarter by 1.6% from a year earlier.

The downturn mirrors a contraction in Germany, the eurozone’s largest economy, which last month reported that data from the first three months of the year showed that its economy had fallen into a recession amid the energy price shock.

But Thursday’s report showed a mixed performance across the region, as southern European economies including Spain, Italy and Portugal all posted strong growth rates, while Germany and the Netherlands shrank, and France grew only mildly.

Since spring, Europe’s overall economy has picked up the pace slightly, and the ​​European Commission has lifted its growth outlook, forecasting expansion of 1.1% this year and 1.6% in 2024.

“Looking ahead, we think consumers’ spending is now rebounding slightly as inflation eases, and we also think government spending will rebound,” Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, wrote in a note. “But this boost likely will be offset by a continued decline in investment, and a further reduction in inventories, reflecting tightening credit standards.”

Governments had hoped to avoid a recession after spending lavishly during the winter months to shield households and businesses from soaring energy and food costs, which had been exacerbated by Russia’s war in Ukraine. Across Europe, countries swiftly stockpiled energy reserves, and a mild winter, together with mass conservation efforts, helped avoid the worst.

The strategy has helped drive down the price of energy, and ​inflation in the eurozone’s biggest economies climbed down from record highs. In May, the annual rate of inflation was 6.1%, the eurozone’s lowest level in more than a year.

But the price of food and a range of services has continued to climb at an uncomfortable pace, raising the odds that the European Central Bank would continue to raise interest rates at its upcoming meetings. The International Monetary Fund has warned that European policymakers’ main challenge this year would be to tame inflation without stoking a severe recession.

Analysts said that the downturn was mild and unlikely to weigh on an economic recovery from the pandemic, but it nonetheless signaled that growth would remain tepid for the remainder of the year.

“It’s hard to argue that this is a recessionary environment,” ING Bank said in a note to clients. “The stagnation of the economy does mark a clear cut from the recent post-pandemic boom though.”

The European Central Bank’s next monetary policy meeting is June 15.