The eurozone wants to avoid a recession this year as economists’ gloom lifts

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

Just last month, analysts polled by Consensus Economics predicted the bloc would slide into recession this year. But this month’s survey found they now expect it to grow 0.1 percent over the course of 2023. This is thanks to lower energy prices, overwhelming government support and the earlier-than-expected reopening of the Chinese economy, poised to boost global demand.

The upgrade comes after officials and business leaders at the annual World Economic Forum in Davos this week also embraced a more positive outlook and the IMF indicated it would soon revise its global growth forecasts.

Economists had feared that Europe would be among the hardest-hit areas of the global economy this year due to its exposure to the economic fallout from Russia’s war with Ukraine. Just weeks ago, IMF director Kristalina Georgieva said that “half of the European Union will be in recession by 2023”.

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

Susannah Streeter, analyst at Hargreaves Lansdown, said: “The threat of the dreaded energy crisis [is] withdrawal and inflation [is] climb down faster than expected.”

Line chart of change in % per annum, by forecast date showing that economists have revised their GDP growth forecast for 2023

“Our perceptions have changed quite radically since October,” said Andrew Kenningham, chief European economist at Capital Economics, adding that government support has been more generous than expected, while the auto sector recovered more strongly than forecast.

According to Anna Titareva, an economist at UBS, there is now less than a 30 percent chance of a recession, compared to an estimated 90 percent last summer. She said the easing of supply chain disruptions, a strong labor market and excess savings account for the eurozone’s economic resilience, and that Europe has been successful in filling its gas storage in recent months, significantly easing fears of gas rationing.

The recent sharp fall in wholesale gas prices, back to levels last seen before the Russian invasion of Ukraine, has also helped improve the economic outlook. JPMorgan this week raised its GDP forecast for the Eurozone for 2023 to 0.5 percent after expecting natural gas prices to be around $76 per megawatt-hour, up from its previous $155 forecast.

Line chart of Index, 2015=100 showing that Eurozone industrial production was resilient despite rising gas prices

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

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 he was “convinced” that Europe’s largest economy would not slip into recession. The governor of the Banque de France, François Villeroy de Galhau, said: “For Europe, we must avoid a recession this year, which I would not 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 downturn 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.

Kenningham warned that aggressive rate hikes by the ECB could lead to a weak recovery.

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

“The eurozone economy can avoid a recession, but interest rates may need to remain high for an extended period of time,” said Kenningham. “It looks like we will have a mild recession at worst, but that will be followed by a weak recovery.”

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