Euro area - economy continues to tread water

The euro area economy stagnated in Q4.

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Christoph Weil

Commerzbank Economic Research

January 31 2024

The result was therefore slightly better than the majority of economists surveyed beforehand. But this is no reason to celebrate. The economy has not grown for two quarters now and the outlook for the first quarter of 2024 is bleak. We do not share the optimism of many economists and the ECB in expecting a significant economic recovery in the near future.

Economy has not grown for two quarters

The euro area economy stagnated in the final quarter of 2022 compared with the third quarter. Officially, a slight contraction of 0.1% was recorded in the third quarter. However, this figure is likely to be revised upwards to 0.0%, as growth figures for the third quarter have been revised slightly upwards in many countries. These revisions will only be reflected in the second estimate of euro area GDP.

However, this does not really change the picture. The massive tightening of monetary policy brought economic growth to a standstill in the summer (chart 1). It is unlikely that the economy will emerge from this weak phase before the spring, as sentiment indicators, in particular the purchasing managers' index for the services sector, have remained in recessionary territory until recently.

A significant upturn is also unlikely for the rest of the year. In view of persistently high inflation, the ECB is unlikely to lower its key rates before the summer, and this is unlikely to have a positive impact on the economy until 2025. The same applies to the other western central banks, which have raised interest rates massively, meaning that their monetary policy will continue to slow the economy until 2024. China is also likely to fail as an economic engine, given the crisis in its property market. This means that there is little hope of exports driving growth in the eurozone.