Real GDP Flatlines in the Eurozone

The eurozone economy has slowed, and even stalled, over the past year. Non-annualized quarterly real GDP gains and losses haven’t exceeded ±0.1% since the last quarter of 2022. Although the lack of meaningful growth across the eurozone as a whole is disappointing, the upside is that the region’s economy hasn’t suffered a deeper contraction. Given the current environment of high interest rates, the rising cost of living, a slowdown in the global manufacturing sector, the energy crisis and labour disputes, the 0.5% gain in real GDP for all of 2023 is still remarkable. A year ago, most forecasters expected—at best—no annual growth at all, and the risk of recession was particularly high.

But we shouldn’t assume that all’s well. The European economy remains vulnerable. PMIs are low, and multiple confidence indicators still suggest that real GDP could shrink over the very short term. A recession can’t be completely ruled out. The economy could also remain stuck in a rut for a long time. However, the steep drop in inflation over the past few quarters has offered some relief. The year-on-year change in consumer prices is nearing the European Central Bank’s 2% target. This means the ECB could be one of the first major central banks to start cutting key interest rates.

The preliminary flash estimate doesn’t include detailed information on GDP components. But it does offer more information on how growth was distributed over different countries. The biggest problems in the region seemed to come from Germany. Real GDP for the eurozone’s biggest economy slipped a non-annualized 0.3% over the fourth quarter. Meanwhile, France once again held steady (0%), even though consumer spending and investment faltered. Real GDP for Spain (+0.6%), Portugal (+0.8%), Belgium (+0.4%) and Italy (+0.2%) all grew in the fourth quarter.

The eurozone’s economy has stalled. Over the past year, its real GDP has either stayed flat or posted minimal gains or losses. The region has managed to avoid a recession so far, and its labour market still doesn’t seem to be affected by the lack of economic growth. A recession can’t be completely ruled out, but stagnation seems more likely for early 2024, especially since the European Central Bank will probably start lowering its key interest rates this spring.