German GDP, Spanish CPI and Can Europe Avoid a Recession?

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Goldman Sachs was one of the recent major banks to upgrade their expectations for the Euro Zone for the coming year. It was previously expected that the common economy would fall into recession in the first half of the year. Now, the forecast shows an expectation that the Euro Area will just barely avoid recession, growing by 0.1% for each of the first two quarters.

Q1 2023 Market Outlook among text Standard

The revision of expectations is based on the dramatic fall in natural gas prices through the fall, and China reopening earlier than expected. The onslaught of warm weather over the past two weeks has provided further optimism that Europe will avoid an energy crisis over the winter as Germany has been able to replenish its natural gas supplies. Additionally, France brought some of its nuclear power plants back online, allowing the country to become a net exporter again.

More room for the ECB?

With inflation only in double digits, there is enough pressure on the ECB to get prices back in line. The ECB expects inflation to remain above target for the next three years. However, high inflation is not a sustainable situation, as seen in the UK. Inflation in the UK has started to rise earlier than in the Euro Area, prompting a series of strikes across the country that threaten to either push the country further into recession or increase inflationary pressures.

There has been some industrial action in Europe, with some firms offering concessions on wages. But as people see their purchasing power diminish over a prolonged period of time, the labor unrest seen in the UK (like the energy crisis before it), could be a preview of what could happen in Europe over the winter and into the spring.

It’s not just Europe

Meanwhile, the World Bank has almost halved its forecasts for growth this year. It previously predicted that the global economy would grow by 3.0%, but now expects only 1.7%. A major part of the pessimism for the outlook is around China, which is expected to have a difficult start to the year. Europe is one of the main exporters to China, and also depends on it for materials. The continued disruption as covid rages through the world’s second largest economy could be expected to affect Europe as well.

The US is also expected to have meager growth in the first half of the year. All this combines to put the ECB in a difficult spot, unwilling to take responsibility for Europe slipping into recession, even if only technically. But something must be done about inflation.

The core that matters

Much of the headline inflation can be attributed to the increased cost of energy. Now that natural gas prices are down, so should the headline CPI figure. But core inflation, the one that matters to the ECB, actually continued to rise. That could cause further headwinds for the economy if the ECB has to raise rates even further to get it under control.

German annual GDP growth is expected to come in at 1.8%Down from the 2.6% recorded in 2021. Meanwhile, core Spanish annual CPI for December is expected to be confirmed as growing to 6.9% from 6.3% reported in November.

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