The eurozone faces a mild recession
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Leading indicators of the state of the European economy indicate that at the end of the fourth quarter of 2023, as well as at the end of the third, the euro area will experience a decline in GDP. The continuing decline in business activity is reflected in the PMI, which in December is well below the 50-point threshold. However, some recovery in the eurozone appears to be on the horizon: this is indicated by the increased values of business sentiment indices in Europe over the past month. At the same time, neither the ECB nor analysts expect much from the European economy in the coming quarters: although the cycle of rate hikes is completed, monetary policy easing will not follow it yet.
Europe could be heading into a technical recession, with leading indicators suggesting that euro area GDP appears to have contracted further in the fourth quarter after contracting 0.1% in the third. From S&P Global data published in early January, it follows that the PMI index of euro area countries remained in the red for the seventh month in a row. Its value in December, as in November, was 47.6 points (an indicator below 50 points indicates a decline in business activity). Remaining in the negative zone, PMI in industry rose to 47.8 points from 47.1 points in November, in services – to 48.8 points from 48.7 points. In Europe’s largest economies, the index was in the red in December: in Germany, the composite PMI dropped to 47.4 points from 47.8 points in November, and in France it increased slightly: to 44.8 points from 44.7 points.
However, analysts call the expected recession shallow: for example, ING Bank expects a reversal in dynamics already in the first half of 2024. Experts point out that the Economic Sentiment Indicator (ESI) calculated by the European Commission (EC) has shown growth for the third month in a row. Thus, in December, the index, although it remained in the negative zone (below 100 points), increased by 1.8 points, to 95.6 points, in the EU (see chart) and by 2.4 points, to 96.4 points , in the euro area.
The EC explains that some improvement in sentiment is largely due to increased confidence among consumers and managers in the service sector, retail trade and construction (including due to the expected increase in demand). The same optimism is not observed in industry: production expectations for the last month of the year remained almost unchanged, estimates for the volume of export orders worsened.
The continued weakness in industry is explained, among other things, by the increasing delayed effects of the ECB’s tight monetary policy (MCP). The regulator last raised rates in September 2023 and has since kept them at the same level (the rate on loans is 4.5%, on deposits – 4%, on margin loans – 4.75%).
A further tightening of the monetary policy, as well as its rapid easing, is not expected: inflation in the eurozone has still not slowed down to the target 2%, although it fluctuates within the range predicted by the regulator. According to Eurostat, in December the annual rate was 2.9% after the lowest since 2021 of 2.4% in November. Given continued weak business activity, a sharper slowdown in price growth could bring the reversal of monetary policy closer: this will happen, according to analysts, no earlier than the second quarter of 2024.
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