A technical recession has just been avoided in the eurozone. Still, the eurozone economy has broadly stagnated since late 2022 and has lost substantial ground to the United States in terms of GDP in recent years. After the buoyant post-pandemic reopening phase, the economy has now entered a phase of prolonged weakness.
Germany continues to drive economic weakness in Europe with a contraction of -0.3% in Q4. Germany is struggling with weak global demand for goods and heavy industry is suffering from higher energy prices. GDP remained stable in France, while southern European economies led the way in terms of growth and were the main drivers in avoiding a technical recession. Spain, Portugal and Italy experienced growth of 0.6, 0.8 and 0.2%, respectively.
The divergence with the United States is increasing. In the eurozone, consumption is suffering much more from the high rise in inflation because wage growth has been slow to adjust due to more negotiated wage setting. This has resulted in a further decline in real wages. And energy competitiveness has been affected by the energy crisis in the eurozone, resulting in a large difference in industrial performance. Furthermore, while eurozone budget deficits remain sizeable, fiscal support is much less than in the United States.
For the coming months, there are some green shoots for the eurozone economy. Survey indicators show signs of bottoming out and real wage growth is slowly starting to recover; the latter should put more money in consumers’ pockets. Throughout the year, this effect should be greater. And financial conditions are easing, which is causing lending indicators to bottom out. That helps investment later in the year. However, we do not expect a significant rebound in GDP growth in the first quarter. In fact, we only expect a material improvement in the eurozone economy much later this year.