No one expected it. Or almost. Not even the ECB itself, which boasted of having avoided a contraction in the economy despite the energy and geopolitical turmoil that has hit Europe in recent months.
But yesterday the Europeans woke up by surprise with the economy in technical recession, that is, with two consecutive quarters of GDP contraction (everything that occurs). It was something that had not been seen since the pandemic year of 2020.
Should we worry? It is true that we are talking about a minimal decline, of just two tenths (-0.1% and -0.1%) between the last part of 2022 and the first three months of 2023. That is, winter. Therefore, it is not difficult to attribute part of this slippage to the impact of the rise in energy prices (and that the temperatures were milder than expected). A rather temporary effect.
But not only. There was a statistical revision of the previous data. In particular, the sharp slowdown in Ireland (-4.6%) and Lithuania (-2.1%) stands out. Dublin tends to provide quite volatile data, because its GDP figures are influenced by variations in the business results of the technological multinationals that are based in its territory, which present frequent accounting fluctuations. Without the Irish case, the eurozone would not have fallen into recession.
Even so, it is necessary to underline the bad data for Germany, with a drop in GDP of 0.3% in the first three months of the year. The European locomotive is in recession and the rest of the European partners cannot help but notice it.
Spain, with an advance of five tenths (0.5% in the first quarter over the previous one) is holding up better than other economies. What's more: it was the country that registered the highest GDP growth in the first quarter in the interannual rate, with 3.8%, more than triple the EU average (1%). But we must not forget that the Spanish economy has yet to return to the value of wealth it had before the Covid-19 pandemic and it is, together with Germany and the Czech Republic, the economy that has lagged the furthest since then.
When examining the components of the GDP of the euro area, the drop in household consumption (-0.1%) can be seen, as well as the impact of inventories (-0.4%). That is to say, that the internal demand suffers. It is impossible not to associate this phenomenon with the persistence of inflation, which makes consumers think a little more about it when it comes to digging into their pockets.
Questions are now open about what the president of the European Central Bank (ECB), Christine Lagarde, will do at the entity's council meeting scheduled for Thursday of next week. Will there be a pause in the announced path of monetary tightening? Eurozone inflation stands at 6.1%, more than triple the 2% target set by the ECB, and core inflation, which does not include the volatile components of food and energy, only dropped to 5.3 % in May.
There is an element that the French will take into account, beyond the technical recession. And it is that, as Eurostat confirmed yesterday, employment rose 0.6% in the first quarter in the euro area. This strength in the labor market, coupled with a 5.3% year-on-year rise in wages through March, could prompt Christine Lagarde to move on the monetary lever once again, without fearing too severe consequences for the real economy.
César Pérez, global director of investments at Pictet WM, is betting on a 25 basis point rise in interest rates in the euro area. “In the US, Jerome Powell wants to be like Paul Volcker, who in the late 1970s and early 1980s raised the price of money to the point of causing a recession. In the eurozone, Christine Lagarde is building her own narrative to go down in history as the person who ended inflation,” he comments. "The problem is that inflation rises like a rocket, but falls like a feather," argues César Pérez.
In Pictet, some economists summarize it like this, paraphrasing the famous phrase of the previous ECB president, Mario Draghi: "we have gone from whatever it takes to whatever it breaks" (from we will do what it takes to we will break what it takes). So far, only a small crack has appeared. But the European stock markets hardly suffered yesterday. And it is that a slight recession can even be good news, if it helps to lower inflation.
