Euro zone economy posts surprise expansion in the fourth quarter, curbing recession fears

The euro zone beat expectations on Tuesday by posting positive growth in the final quarter of 2022 and reducing fears of a potential regional recession.

Preliminary Eurostat data released Tuesday showed that the euro zone grew 0.1% in the fourth quarter. Economists had pointed to a 0.1% contraction over the same period, according to Reuters.

The latest figures come after the euro area posted a 0.3% GDP increase for the third quarter of last year.

The region has been under significant pressure in the wake of Russia’s invasion of Ukraine, as high food and energy costs compounded long-standing supply chain bottlenecks. Last year, economists warned that the 20-member region could be about to enter an economic recession.

Energy prices cooled off in the latter part of 2022, bringing some relief to the euro zone’s broader economic performance.

The euro zone is expected to have grown by 1.9% in the fourth quarter, compared with the same period of 2021, according to the preliminary data.

“The advance euro zone GDP report shows that economic growth slowed again in the fourth quarter but didn’t fall outright, defying the message from the business surveys,” Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said in an email to clients.

However, Germany surprised to the downside at a country breakdown level. The biggest European economy contracted by 0.2% in the last quarter of 2022, with analysts now expecting Berlin will head into a recession.

“Germany has likely entered a shallow and short recession in the fourth quarter that will last through the first quarter before the economy stabilises in the second quarter (of this year),” Salomon Fiedler, economist at Berenberg, said in a note Monday.

Italy, the region’s third largest economy, also reported negative growth — down by 0.1% in the fourth quarter. Rome and Berlin had some of the strongest links to Russian gas.

“Taking today’s data at face value means the euro zone likely avoided entering a technical recession this quarter, just. This will embolden the ECB to continue on its steep tightening path to fight inflation,” Debono from Pantheon Macroeconomics said.

The ECB is due to meet and determine its next monetary policy steps on Thursday. Economists polled by Reuters and Factset project that the bank will agree a 50 basis point increase in interest rates, taking its main rate to 2.5%.

Market players will be listening attentively to ECB President Christine Lagarde for clues on how many more rate hikes might occur over the coming months.

Some economists argue that the euro zone is still poised to enter a recession later this year.

“Looking ahead, we think the euro-zone (excluding Ireland) will fall into recession in the first half of this year as the effects of the ECB’s policy tightening intensify, households struggle with the cost of living crisis and external demand remains sluggish,” Andrew Kenningham, chief Europe economist at Capital Economics, said in an email Tuesday.

“But this will not put the ECB off its plans to hike rates further, including by 50 basis points on Thursday.” he added.