No one expected it. Or hardly anyone. Nor the same European Central Bank (ECB), which boasted of having avoided a contraction of the economy, despite the energy and geopolitical turbulences that have affected Europe in recent months.
But yesterday the Europeans woke up to a surprise with the economy in technical recession, that is, with two quarters in a row of GDP contraction (everything that is produced). It was something that had not been seen since the pandemic year of 2020.
Do you need to relax? It is true that we are talking about a minimal setback, of only 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 rising energy prices (and the fact that temperatures were milder than expected). A rather conjunctural effect.
But not only that. There was a statistical review of the above data. In particular, the sharp slowdown in Ireland (-4.6%) and Lithuania (-2.1%) stands out. Dublin tends to provide highly volatile data, because its GDP figures are influenced by variations in the business results of the technology multinationals based in the territory, which have frequent accounting swings. Without the Irish case, the Eurozone would not have fallen into recession. Nevertheless, 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. Even more: it was the country that recorded the highest growth in GDP in the first quarter at a year-on-year rate of 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 pandemic, and it is, along with Germany and the Czech Republic, the economy that is lagging behind the most since then .
When examining the components of the GDP of the eurozone, we can see the decline in household consumption (-0.1%), as well as the impact of inventories (-0.4%). In other words, internal demand suffers. It is impossible not to associate this phenomenon with the persistence of inflation, which makes consumers think a little more when scratching their pockets.
Questions are now being asked about what the president of the ECB, Christine Lagarde, will do at the meeting of the board of the entity scheduled for Thursday. 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 excludes the volatile components of food and energy, only fell 5.3% in May.
There is one element that the French will take into account, beyond the technical recession. As Eurostat confirmed yesterday, employment rose in the first quarter in the eurozone by 0.6%. This strength in the labor market, coupled with a year-on-year rise in wages of 5.3% through March, could induce Christine Lagarde to act on the monetary lever once again, without fear of too serious consequences for the real economy .
César Pérez, global director of investments at Pictet WM, is betting on a 25 basis point increase in interest rates in the eurozone. "In the US, Jerome Powell wants to be like Paul Volcker, who in the late seventies and early eighties 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 put an end to inflation", she 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 president of the ECB, Mario Draghi: "We have gone from whatever it takes to whatever it breaks" (we will do whatever it takes to break whatever it takes). So far, only a small crack has appeared. But the European stock markets barely showed any signs of resistance yesterday. A mild recession can even be good news, if it helps lower inflation.
