Europe’s recession may already be over

Solid economic growth in France and Spain, and a very modest recovery in Germany could be enough to confirm that the euro area has already exited a recession that started in the final quarter of 2022.

Official data showed that French GDP was up 0.5 per cent in the April-June period, compared with the first quarter of 2023, driven by a strong performance in foreign trade, CNN reports.

“Exports bounced back this quarter … as well as imports to a lesser extent,” the French national statistics office said in a statement.

Spain reported GDP growth of 0.4 per cent, just a shade weaker than in the first quarter.

Germany stagnated, but that was an improvement on the preceding two quarters when Europe’s biggest economy contracted.

“Household final consumption expenditure stabilized in the 2nd quarter of 2023 after the weak winter half-year,” the German statistics office said in a statement.

Second-quarter GDP figures for the euro area as a whole will be published on Monday.

“We expect a modest expansion in eurozone GDP after two weak quarters,” Oxford Economics said in a research note on Friday. “National data released so far point to a possible small upside surprise, particularly thanks to surprisingly strong growth in France.”

But even if they confirm that the region is growing again, following two consecutive quarters of contraction, recent survey data suggest that a marked acceleration in economic activity is unlikely, despite easing inflationary pressures and the possibility that interest rates may now be near their peak.

A survey of professional forecasters published by the European Central Bank on Friday showed that expectations for euro area GDP growth this year were unchanged at 0.6 per cent, compared with three months ago, while projections for 2024 had been trimmed slightly to 1.1 per cent.

Lower inflation and rising wages were supporting consumption but higher interest rates, and uncertainty about further rate hikes were slowing investment.

“This was seen as being compounded by a slowdown due to the weak manufacturing sector, with headwinds from the slower than expected recovery in China. However, respondents considered services sector resilience as partially countering this weakness and thus broadly maintained their earlier expectations for real GDP growth in 2023,” the ECB said.

Only 7 per cent of forecasters expect the euro area to suffer another recession, or two consecutive quarters of contraction, between now and the first quarter of 2024.

The ECB on July 27 raised interest rates in the euro area to 3.75 per cent, matching the highest rate since the launch of the euro currency in 1999 as it continues to bear down on inflation. But it kept investors guessing about whether it will pause, or hike again, at its next meeting.

“We have an open mind as to what the decisions will be in September and in subsequent meetings,” ECB President Christine Lagarde told journalists, adding “we might hike [or] we might hold.”

Rate cuts are not on the table, however. “That is a definite no,” Lagarde said.

Demand for business loans fell to a record low in the second quarter, according to a survey published by the ECB Tuesday. The report also found that banks had tightened credit standards further across all loan categories.

Separately, survey data released Monday showed that business activity in the euro area contracted at the fastest pace in eight months in July.

An initial reading of the Purchasing Managers’ Index, which tracks activity in the manufacturing and service sectors, dropped to 48.9 from 49.9 in June. A reading below 50 indicates a contraction.