Data from the statistics agency Eurostat revealed on Thursday that the euro zone economy entered a technical recession in the first three months of 2023, as indications rise that the region’s prospects for future development will be hampered by central bank rate hikes.

In comparison to the fourth quarter of 2022, when GDP likewise declined by 0.1%, revised from a previous reading of zero, the 20-country euro zone’s GDP fell by 0.1% in the first quarter. A technical recession is characterised by two consecutive quarters of decrease.

“Domestic demand is not in a good place,” Oxford Economics’ analysts said in a note, adding first-quarter public spending saw the largest contraction on record except for during the first wave of coronavirus lockdowns in 2020.

“Going forward, growth will remain soft despite dropping wholesale energy prices, as monetary policy tightening dents investment and still-present inflationary pressures constrain consumption,” they said.

Separately, according to Reuters polled economists, quarterly growth will pick up by a modest 0.2% in each of the final three months of this year. They also predict that the European Central Bank will increase interest rates by an additional 25 basis points at its meetings in June and July in an effort to combat persistent inflation.

In an unprecedented tightening of 425 basis points since the bank pushed rates out of negative territory last July, it would raise the ECB’s deposit rate to 3.75%.

Compared to a year earlier, the euro zone’s GDP increased by 1.0% in the first quarter, according to Eurostat, which is less than the 1.3% growth estimate from a flash estimate released on May 16. Reuters polled economists, who predicted a 1.2% annual growth and no growth over the previous quarter.

The primary reason for the modification was a second estimate from Germany’s statistics office that indicated the biggest economy in the euro zone was experiencing a recession in early 2023.

From an initial estimate of 2.7%, the Irish economy’s shrinkage increased to 4.6%; nevertheless, this negative was brought on by how huge multinational corporations affected the country’s growth.

As the euro zone struggled with rising energy and food prices and as the post-pandemic spending spree faded, a recession had been anticipated towards the end of last year. Initial projections had indicated that the area had escaped this.

Greece, Lithuania, Malta, and the Netherlands all saw a decrease in GDP quarter over quarter in addition to Germany and Ireland.

According to Eurostat, household spending, governmental spending, and inventory movements were all subtracted from the quarterly GDP by 0.1 percent, 0.3 percent, and 0.4 percent, respectively. As imports fell, net commerce increased by 0.7 points, and gross fixed capital formation increased by 0.1 points.

On the other hand, in line with earlier projections, employment growth accelerated at the beginning of 2023, going from 0.3% in the fourth quarter of 2022 to 0.6% in the first quarter. That was an increase of 1.6% from the previous year.

Except for Greece, Lithuania, and Slovakia, every country had an increase in employment on a quarterly basis.

(Adapted from USNews.com)

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