Eurozone Economy Unexpectedly Grows

The Eurozone on Tuesday beat expectations for a positive increase in the final quarter of 2022 and eased fears of a potential regional recession.

The first data from Eurostat on Tuesday showed that the euro area grew by 0.12% in the fourth quarter. Economists predicted a 0.12% decline in the same period. The latest statistics come after the Eurozone saw GDP growth of 0.32% in the third quarter of last year.

The region has been under significant pressure since Russia’s invasion of Ukraine, as high humanitarian and energy costs have disrupted long supply chains. Last year, experts warned that the 20-member region could fall into economic recession.

Energy prices are set to ease in the second half of 2022, providing relief to the broader eurozone economic outlook. However, Germany has been surprised by the decline in the country’s level of decay. Europe’s largest economy shrank by 0.25% in the last quarter of 2022. Experts now expect a recession in Berlin. Germany entered a shallow and short-lived recession in the fourth quarter, which will continue into the first quarter before the economy stabilizes in the second quarter.

The third-largest economy in the area, Italy, also posted negative growth, falling 0.14% in the final three months of the year. Rome and Berlin had the strongest connection with Russian gas.

All Eyes on ECB

Taking today’s data at face value means the Eurozone is likely to have avoided a technical recession this quarter. This will encourage the ECB to continue its steep tightening path to fight inflation.

The ECB is due to meet and decide on the next steps for monetary policy on Thursday. Market players will certainly listen to ECB President Christine Lagarde for relevant information on how many rate hikes could happen in the next period.

Some economists also argue that the Eurozone is still poised to enter a recession at the end of this year.

Looking ahead, we think the Eurozone (excluding Ireland) will slip into recession in the first half of this year as ECB policy tightening intensifies. Households are facing a severe subsistence crisis. But that won’t stop the ECB from plans to raise rates further, including by 50 basis points on Thursday.