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EU GDP Reduces Recession Fears Ahead of ECB Meeting

Stavros Tousios | Wednesday 01 February 2023

On Tuesday, January 31, Eurostat gave the first look at GDP figures from the Eurozone, showing that according to a preliminary measure, the shared economy grew by 0.1% during the first quarter. The consensus among analysts had been a contraction of 0.1% during that period. This compares to a 0.3% growth rate seen in Q3 GDP figures.

The beat on expectations showing the economy grew in the last quarter of 2022 reduced concern that the region could be heading into a technical recession. A recession meets the technical definition of two consecutive quarters of economic contraction. The last time the Eurozone had a negative quarter of growth was in early 2021, in the wake of the omicron variant leading to renewed restrictions.

Regardless, some economists believe the Eurozone is still poised to enter a recession later this year. However, they think the ECB will not be deterred from raising interest rates further, including the 50 basis points it is expected to go ahead with on Thursday, February 2, at this policy meeting.

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Breakdown of The Market Reaction

Following the release of the data, the European Stoxx 600 index, a leading Euro benchmark index closed down as all major European indices slid in the red, despite the beat in region-wide GDP. Regardless, the Europe 50 index (FESX) still managed to gain around 10% in the month of January. 

Other data reported at the time surprised to the downside, such as German December retail sales figures. That was in the context of German GDP, also surprising to the downside, as the biggest economy in the Eurozone contracted by 0.2% in the fourth quarter. As a consequence, many analysts are now expecting the country to slip into a recession. The release of the contraction figures in Germany resulted in a decline of 0.83% for the DAX (Germany 40) by 11:30 GMT.

The other big economy in the Eurozone to report negative growth was Italy, while France and Spain showed expansion. It should be noted that these figures are subject to revision, and they may change at the next release. Economists had expected a more bleak picture because surging inflation was seen as depleting consumer savings, causing businesses to hold back investment. However, it appears that businesses adjusted faster to the changed circumstances, allowing for a beat in expectations.

Turning to Forecasts

More recent figures, such as consumer confidence figures and PMI surveys, support the idea that growth might have already bottomed out. A more mild winter has limited energy spending. Ireland's 3.5% growth figure might have distorted the overall picture, as it was primarily driven by foreign companies based on tax reasons. Without Ireland, growth in the Eurozone would have been negative and into contraction.

Analysts point to the latest GDP figure as likely to embolden the ECB in continuing tightening in order to get inflation under control. The latest survey of economists shows an expectation for a 50 basis point hike at the meeting, bringing the reference interest rate to 2.5%. Beyond that, traders are likely to be paying close attention to ECB President Christine Lagarde's post-rate comments for clues as to how many rate hikes to expect in the coming months.

Markets expect the ECB to raise interest rates by another 150 basis points by the middle of the year, after raising a total of 250 basis points since July of 2022, when the current rate cycle began. That would push the base rate to the highest level since 2000. The tightening of the policy has dramatically slowed bank lending, and access to loans is at its lowest level since the 2011 crisis, with analysts seeing monetary policy increasingly slowing down the economy. (Source:CNBC)

Conclusion

Eurozone GDP growth in the fourth quarter beat expectations, but a closer look at the individual countries, such as Germany and France, kept the market from gaining too much optimism. The ECB is due to meet on Thursday, with a consensus that another hike of 50 basis points will be the result, with attention turning to how many rate hikes will occur in the coming months.


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