Euro zone economy narrowly skirts recession, stagnates in fourth quarter

The euro zone economy stabilized in the fourth quarter of 2023, flash figures published by the European Union’s statistics agency showed on Tuesday.

The bloc narrowly avoided the shallow recession that was forecast in a Reuters poll of economists, following a 0.1% fall in GDP in the third quarter.

The euro zone’s seasonally-adjusted GDP was flat compared with the previous quarter and expanded by 0.1% versus the previous year. In a preliminary estimate, the euro area was seen posting 0.5% growth over the whole of 2023.

Its biggest economy, Germany, posted a 0.3% contraction in the final quarter of the year, according to figures also out on Tuesday. The country narrowly skirted a technical recession due to an upwards revision to its reading for the third quarter, when the economy stagnated.

The French economy was steady in the fourth quarter, while Spain outperformed forecasts to expand by 0.6%.

The European Commission’s euro zone sentiment indicator meanwhile showed a decline in consumer confidence — though the outlook for businesses in services and industrials was slightly brighter.

The euro zone economy is in a “phase of prolonged weakness” that is being driven by Germany, while southern European economies lead the way in growth, Bert Colijn, senior economist at ING, said in a note.

“Germany is struggling with weak global demand for goods and heavy industry is suffering from higher energy prices,” he said.

The euro zone’s divergence from the U.S. is growing, he added, partly explained by a larger decline in inflation-adjusted wages, energy prices hitting industrials, and lower levels of fiscal support.

The euro continued to log narrow losses against the U.S. dollar following the fresh Tuesday data, also posting tight gains against the British pound. The U.S. economy smashed expectations for the end of the year, expanding by 3.3% in the fourth quarter. U.K. figures are due out in the middle of February.

The European Central Bank has hauled interest rates to a record high over the last year and a half, creating tighter financial conditions across the region which have helped cool inflation from a peak of 10.6% in October 2022 to 2.9% in December. The latest euro zone inflation flash figures are due Thursday.