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The eurozone is poised to avoid recession this year as economists’ gloom mounts

The eurozone will avoid recession this year, according to a widely watched survey of economists that illustrates a sharp turnaround in global economic sentiment in recent weeks.

As recently as last month, analysts polled by Consensus Economics predicted the bloc would fall into recession this year. But this month’s survey showed they now expect it to grow 0.1 percent in 2023. That’s thanks to lower energy prices, heavy government support and an earlier-than-expected reopening of China’s economy, which is set to boost global demand. .

The improvement comes after officials and business leaders at this week’s annual World Economic Forum in Davos also embraced a more optimistic outlook, and the IMF signaled it would soon upgrade its global growth forecasts.

Economists feared that Europe would be among the hardest hit areas of the global economy this year due to exposure to the economic consequences of Russia’s war with Ukraine. Just a few weeks ago, IMF Executive Director Kristalina Georgieva said that “half of the European Union will be in recession” during 2023.

Carsten Brzeski, head of macro research at ING Bank, described the reversal in economists’ forecasts as “a recession that never came”.

Susannah Streeter, an analyst at Hargreaves Lansdowne, said: “The dreaded energy crisis threat [is] withdrawal, and inflation [is] going down faster than expected.”

Line chart of annual percentage change by forecast date showing economists' revisions to their 2023 GDP growth forecast.

“Our perception has changed quite radically since October,” said Andrew Cunningham, chief economist for Europe at Capital Economics, adding that government support had been more generous than expected, while the auto sector had recovered more strongly than forecast.

There is now less than a 30 percent chance of a recession, down from an estimated 90 percent last summer, according to Anna Titareva, an economist at UBS. She said easing supply chain disruptions, a strong labor market and excess savings explained the eurozone’s economic resilience, and Europe had been successful in filling its gas storage in recent months, largely easing fears of gas rationing.

The recent sharp drop in wholesale gas prices to levels last seen before Russia’s invasion of Ukraine has also helped to improve the economic outlook. JPMorgan this week raised its 2023 eurozone GDP forecast to 0.5 percent after predicting natural gas prices to be around 76 euros per megawatt-hour, instead of the 155 euros they had previously expected.

Line graph of the index, 2015=100 showing that industrial production in the Eurozone was resilient, despite rising gas prices

Speaking in Davos this week, Christine Lagarde, president of the European Central Bank, said the economic outlook looked “much better” than feared. Gita Gopinath, the IMF’s deputy managing director, said China’s decision last month to ease Covid-19 restrictions was one of the reasons the fund had become more optimistic.

Sven Jari Stehn, an economist at Goldman Sachs, said stronger demand in China would “significantly boost European trade, especially in Germany.”

German Chancellor Olaf Scholz said this week that he is “convinced” that Europe’s largest economy will not fall into recession. Banque de France governor Francois Villeroy de Gaulle said: “For Europe, we should avoid a recession this year, which I wouldn’t have said with such confidence three months ago.”

Some economists still expect a recession. Silvia Ardagna, an economist at Barclays Bank, said that while the fall would not be as deep as previously thought, the eurozone economy would still contract for two consecutive quarters – meeting the technical definition of a recession.

Cunningham warned that an aggressive rate hike by the ECB could lead to a weak recovery.

Lagarde announced in Davos that the ECB will raise interest rates by 50 basis points at its meetings in February and March. The deposit rate has already risen by 2.5 percentage points to 2 percent since June last year, a pace of tightening that euro zone economies have not experienced before.

“The eurozone economy could avoid recession, but interest rates may have to remain high for a longer period,” Cunningham said. “It looks like we could get — at worst — a mild recession, but it will be followed by a weak recovery.”

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