Eurozone hammer blow as gloomy forecast warns of ‘sluggish’ economic growth

Disappointing data indicating the Eurozone economy contracted in the third quarter of 2023 has prompted analysts to forecast “sluggish growth” throughout the monetary union for at least two years.

And Germany, traditionally the European Union’s economic powerhouse, is “struggling”, the UK-based Centre for Economics and Business Research has warned.

The analysis was in response to a preliminary estimate published by Eurostat, the European Union’s statistics division, yesterday indicating a 0.1 percent contraction in Q3, 2023.

The figures contrasted with the previous period, which had seen an upwardly revised 0.2 percent expansion in Q2 2023, up from the previous estimate of 0.1 percent.

The strongest growth among the 19 countries signed up to the single currency came in Latvia, where output rose by 0.6 percent.

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France and Spain also saw growth of 0.1 percent and 0.3 percent respectively – but Germany’s economy shrank by 0.1 percent.

Speaking yesterday, Pushpin Singh, the CEBR’s Senior Economist, said: “The currency bloc continues to be affected by elevated inflation and the ECB’s response to higher interest rates, the impacts of which continue to feed through to the economy.

“The ECB, trying to balance the need to fight inflation with the desire to avoid unnecessary economic harm, opted to pause its monetary tightening campaign at its latest Governing Council meeting last week. “

He added: “Nonetheless, key interest rates in the currency bloc are expected to remain elevated as the ECB looks to stamp out lingering price pressure, and this will likely act as a drag on growth.

“As such, Cebr forecasts that the Eurozone economy will face sluggish growth over this year and next.”

An upwardly revised 0.1 percent expansion in Q2 means Europe’s largest economy has avoided a technical recession over the last year, the CEBR’s report said.

However, it added: “With quarterly output growth either stagnating or in contractionary territory in four out of the last six quarters, there are clear signs that the German economy is struggling.

“Q3’s reading highlights the prevailing challenges confronting the Eurozone.

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“Tighter monetary conditions, in an attempt by the European Central Bank (ECB) to dampen persistent price pressure, are having a constraining influence on economic activity in the Eurozone.

“All else equal, higher borrowing costs serve to limit demand by making debt more expensive and attracting consumers to save.”

The impact of tighter monetary policy on economic output was likely “weighing on policymakers’ minds”, warned the report.

The ECB’s Governing Council last week opted not to increase interest rates for the first time since July 2022, the CEBR pointed out.

Nevertheless, with core and services inflation still running at more than four percent according to separate Eurostat figures also released yesterday, it was likely that interest rates would be kept “elevated for some time in a bid fully stamp out inflationary pressure”.

In turn, limited economic activity “places a drag on growth in the near term”, the report argued.

It concluded: “CEBR anticipates that the Eurozone economy will exhibit minimal GDP growth for the current year (0.5 percent), following annual growth of 3.5 percent in 2022.

“With interest rates expected to remain elevated over the medium term, CEBR projects sustained low growth of 0.9 percent for 2024.”

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