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Is the Eurozone Facing an Economic Recession ?
Investment in Europe

Is the Eurozone Facing an Economic Recession ?

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7 NOV, 2023

By RankiaPro Europe

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Comment by Pablo Duarte, Senior Analyst at the Flossbach von Storch Research Institute

The most recent growth and inflation indicators in the Eurozone do not bode well. The Eurozone has recorded a contraction of Gross Domestic Product (GDP) by -0.1% and a drop in the inflation rate from 4.3% to 2.9%. Out of this decrease of 1.4 percentage points, 1.5 points are attributed to the base effect, offset by a 0.1 increase in monthly inflation. These figures only confirm what leading indicators had already foreshadowed: the period of stagflation that has characterized the last two years may be giving way to a recession. Although the economic slowdown appears to be mitigating inflationary pressure, it has not yet reached levels considered acceptable by the European Central Bank (ECB).

Germany, the largest economy in the monetary union, has once again reported negative growth. Inflation, on the other hand, has shown a surprising decline, dropping from 4.3% to 3% year-on-year. Although 1.15 out of the 1.3 percentage points of this reduction are due to the base effect, it is notable that the price index has retreated compared to the previous month. A similar situation can be observed in Italy, where growth was -0.04% and inflation fell from 5.6% to 1.9% due to a 3.7% base effect. In Spain, growth has decelerated to 0.3% compared to the previous quarter, while inflation has experienced a slight increase, reaching 3.5%. The base effect had less impact since prices remained stable in October of the previous year.

Overall, we are witnessing an economic slowdown accompanied by a slower pace of price increases. When we add to these data the credit outlook of the banks, as reflected in the Euro Area Bank Lending Survey (BLS), which indicates that credit demand continues to decline and financial conditions will become even tighter, it is evident that the probability of a recession in the Eurozone in the coming quarters has increased. In a scenario marked by geopolitical uncertainty and with the ongoing war in Ukraine, the risk of a potential supply shock that not only dampens the economy but also fans the flames of inflation is palpable. Uncertainty continues to be the central theme of the macroeconomic landscape. The most recent data suggest that, for a weakened Eurozone, navigating the challenges will be more challenging than for the United States, whose real economy still demonstrates resilience.

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