The recession that the eurozone experienced from October to March was quite literally the mildest possible. But the flip side is that most recent data show that the European economy appears to be going absolutely nowhere.
The Eurostat statistics agency on Thursday revised its estimate of first-quarter GDP from an initially reported rise of 0.1% to a decrease of 0.1%. That follows the 0.1% dip in the fourth quarter of 2022, which also represented a downward revision from a previous estimate of stagnation.
Unlike the U.S., the eurozone data is presented in a quarter-on-quarter format; by the same metric, the U.S. economy grew 0.3% in the first quarter, compared to the 1.3% annualized rate the Commerce Department reported.
While sputtering, it’s important to note the eurozone economy isn’t collapsing, either. Eurostat reported there was a 0.6% increase in employment, and the same growth in hours worked during the quarter. The National Bureau of Economic Research, which assesses whether the U.S. is in recession, says it puts the most emphasis on employment and personal income adjusted for inflation and transfer payments.
The eurozone downgrade was expected after Germany and Ireland each had lowered their assessments of the first quarter. The biggest drags came from inventories, and government and household spending both weighed on the eurozone economy, Eurostat said.
The Irish GDP downturn of 4.6% — mostly relating to intellectual property shifts from U.S.-based companies — on its own subtracted 0.15% from eurozone GDP in the first quarter, noted Holger Schmieding, chief economist at Berenberg. In Germany, the end of free COVID-19 testing and vaccinations was responsible for nearly the entire drop in government consumption, he added.
The loss of natural gas exports from Russia has put pressure on both businesses and households in Europe.
Related: Inside Germany’s industrial-sized effort to wean itself off Putin and Russian natural gas
“The significant downward revision was mainly due to Germany revising down its numbers as new data came in. This fuels the idea that March activity was very weak, making a quick rebound in the second quarter unlikely. With May survey data being weak across the board, it is likely that we only get a modest uptick after the two quarters of downturn,” said Bert Colijn, senior economist, eurozone at ING.
The HCOB eurozone composite PMI index fell to a three-month low of 52.8 in May, a level that is expansionary. The European Commission’s eurozone economic sentiment indicator fell 2.5 points to 96.5, which is below the 100 long-term average from 2000 to 2022.
The European Central Bank next week is expected to continue its rate-hike campaign with a quarter-point increase, even as the staff is likely to lower GDP estimates for this year and next.
The Vanguard FTSE Europe ETF
VGK,
a popular vehicle for investing in European equities, has climbed 10% this year, a slight underperformance to the 11% advance for the S&P 500
SPX,
The euro
EURUSD,
this year has inched higher versus the dollar.
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