Why it matters
Persistently high inflation plunged many consumers across the continent into a cost-of-living crisis, prompting them to scale back their spending significantly over the period. Spending in the euro zone fell 0.3 percent in the first three months of this year after falling 1 percent in the previous quarter. Imports also fell sharply as demand for goods and services contracted.
Public spending, which surged during the pandemic lockdowns, also fell sharply, falling 1.6 percent year-on-year in the first quarter.
The slowdown mirrors a slowdown in Germany, the euro zone’s largest economy, which reported last month that data for the first three months of the year showed its economy had slipped into recession amid the energy price shock.
However, Thursday’s report showed mixed performance across the region, as southern European economies including Spain, Italy and Portugal all posted strong growth rates, while Germany and the Netherlands shrank and France grew only modestly.
Europe’s broader economy has picked up modest momentum since the spring and the European Commission has upgraded its growth outlook, forecasting growth of 1.1 percent this year and 1.6 percent in 2024.
“Looking ahead, we believe consumer spending is now recovering slightly as inflation eases, and we also expect government spending to pick up again,” wrote Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a note. “But that increase is likely to be offset by a continued decline in investment and further destocking, reflecting tighter credit standards.”
background
Governments had hoped to avoid a recession after spending lavishly over the winter months to protect households and businesses from rising energy and food costs, exacerbated by Russia’s war in Ukraine. Countries across Europe were rapidly stocking up on energy supplies, and a mild winter and massive environmental protection efforts helped prevent the worst.
The strategy has helped drive down energy prices and inflation in the eurozone’s largest economies has fallen from record highs. In May, the annual inflation rate was 6.1 percent, the lowest level in the euro zone in more than a year.
But food prices and a range of services have continued to rise at an uneasy pace, increasing the likelihood that the European Central Bank will hike rates further at its forthcoming meetings. The International Monetary Fund has warned that the main challenge for European policymakers this year will be to contain inflation without triggering a deep recession.
What’s next
Analysts said the downturn was mild and unlikely to affect the economic recovery from the pandemic, but still signaled growth would remain subdued for the rest of the year.
“It’s hard to argue that this is a recessionary environment,” ING Bank said in a statement to its clients. “However, the stagnation of the economy marks a clear break from the recent post-pandemic boom.”
The next monetary policy meeting of the European Central Bank is next Thursday.