The eurozone is poised to avoid a recession this year as economists grow gloomier

The Eurozone will avoid a recession this year according to a widely watched survey of economists which shows the sharp shift in global economic sentiment in the past two weeks.

As recently as last month, analysts polled by Consensus Economics predicted that the bloc would plunge into recession this year. But this month’s poll found that they now expect it to grow by 0.1 percent over the course of 2023. This is due to lower energy prices, plentiful government subsidies and the earlier-than-expected reopening of China’s economy, which is set. to boost global demand.

The upgrade comes after officials and business leaders at the annual World Economic Forum this week in Davos also adopted a more optimistic outlook, and the International Monetary Fund indicated it would soon upgrade its global growth forecasts.

Economists feared that Europe would be among the hardest hit regions of the global economy this year due to its exposure to the economic consequences of Russia’s war with Ukraine. A few weeks ago, the managing director of the International Monetary Fund, Kristalina Georgieva, said that “half of the European Union will be in recession” during 2023.

Carsten Brzeski, head of macro research at ING Bank, called the shift in economists’ forecasts “a recession that never happened.”

Susannah Streeter, analyst at Hargreaves Lansdown, said: “The threat of a scary energy crisis [is] Retraction and inflation [is] Climbs faster than expected.”

“Our perceptions have changed radically since October,” said Andrew Kenningham, chief European economist at Capital Economics, adding that government support was more generous than expected, while the auto sector rebounded more strongly than expected.

There is now less than 30 percent chance of a recession, down from 90 percent last summer, according to Anna Titareva, an economist at UBS. She said that the easing of supply chain disruptions, a strong labor market and excess savings explains the economic resilience of the eurozone. Europe has succeeded in filling gas reserves in recent months, which has greatly reduced fears of gas rationing.

The recent sharp drop in wholesale gas prices to levels last seen before Russia’s invasion of Ukraine also helped boost the economic outlook. JPMorgan this week raised its forecast for eurozone GDP for 2023 to 0.5 percent after forecasting natural gas prices to be around 76 euros per megawatt-hour, instead of its previous forecast of 155 euros.

Line graph for the indicator, 2015 = 100 shows that industrial production in the eurozone was resilient, despite higher gas prices

Speaking in Davos this week, Christine Lagarde, the president of the European Central Bank, said the economic prognosis was looking “much better” than feared. Gita Gopinath, deputy managing director of the International Monetary Fund, said China’s decision last month to ease Covid-19 restrictions was one of the reasons the fund was more optimistic.

Strong demand in China should “significantly boost European trade, especially in Germany,” said Sven Gary Steen, an economist at Goldman Sachs.

German Chancellor Olaf Scholz said this week that he is “convinced” that Europe’s largest economy will not fall into recession. “For Europe, we must avoid a recession this year, which I would not have said with such confidence three months ago,” said Bank of France Governor François Villeroi de Gallau.

Some economists still expect a recession. Silvia Ardagna, an economist at Barclays Bank, said that while the downturn will not be as deep as previously thought, the eurozone economy will still contract for two consecutive quarters – according to the technical definition of a recession.

Kenningham warned that large interest rate increases by the European Central Bank could lead to a weak recovery.

Lagarde indicated in Davos that the European Central Bank will raise interest rates by 50 basis points at its meetings in February and March. The deposit rate has already risen by 2.5 percentage points to 2 percent since June last year, a pace of tightening not seen before in eurozone economies.

“The eurozone economy may avoid a recession, but interest rates may need to stay high for a long time,” Kenningham said. “It looks like we may see – at worst – a mild recession, but a weak recovery will follow.”

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