Euro zone enters recession after Germany, Ireland growth revision

The euro zone, consisting of 20 member countries, has found itself in a challenging economic situation as it officially entered a recession during the first quarter of this year. The latest revised estimates from Eurostat, the region’s statistics office, reveal that the gross domestic product (GDP) of the euro zone contracted by -0.1% in that period, marking a significant downturn.

Initially, in a preliminary report, Eurostat had stated that the euro zone experienced a modest growth of 0.1% in the first three months of the year. However, this optimistic outlook was adjusted downward after Germany, one of the prominent economies within the bloc, also revised its growth figures for the same period and officially entered a recession. Additionally, Ireland revised its growth rate downwards, demonstrating a contraction of almost 5%.

Prior to the weak performance observed from January to March, the euro zone had already contracted by 0.1% in the final quarter of 2022. The consecutive two quarters of negative GDP performance have consequently pushed the broader region into what is referred to as a “technical recession.”

The confirmation of the contraction in GDP for the first quarter has sparked concerns among economists, who are now expressing a lack of optimism for the months ahead. Andrew Kenningham, Chief Europe Economist at Capital Economics, noted that the euro zone’s fall into a technical recession in the first quarter implies a belief that the economy will continue to contract throughout the rest of the year.

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Several euro economies, including Ireland, the Netherlands, Germany, and Greece, reported a quarter-on-quarter economic contraction during the first quarter. The challenges faced by households in the euro zone are evident, as household consumption dropped by 0.3% in the same period, highlighting the strains consumers are enduring due to rising prices.

Claus Vistesen of Pantheon Macroeconomics expressed skepticism about the euro zone’s prospects, stating that the region is unlikely to experience significant growth in the coming months, with expectations of a slowdown in investment.

The lackluster economic environment poses a dilemma for the European Central Bank (ECB), which has followed a hawkish monetary policy path over the past year and recently set its main rate at 3.25%. The ECB’s upcoming meeting faces increased scrutiny, as market players have already factored in another 25 basis point hike. However, the poor economic performance could limit the ECB’s ability to further raise rates in an attempt to combat inflation. ECB officials have previously indicated that it is more important to address price increases than to avoid an economic slowdown.

As the data announcement on the euro zone’s recession became public, euro zone bond yields witnessed a general increase in trading on Thursday. This response suggests that several market participants anticipate further tightening of monetary policy in the region.