Economic activity in the 20 countries that use the euro as their currency dipped around the turn of the year.
London CNN  — 

The 20 countries that use the euro fell into a mild recession around the turn of the year, as high inflation discouraged consumer spending and governments tightened the purse strings.

In the first three months of the year, economic output in the eurozone dropped 0.1% compared with the previous quarter, according to revised official data published Thursday. In the fourth quarter of 2022, output also dipped 0.1%, the figures showed.

A recession is typically defined as two consecutive quarters of economic contraction.

The broader European economy, however, avoided the downturn. Across the European Union, gross domestic product ticked up 0.1% in the first quarter after falling 0.2% late last year.

Commenting on the eurozone data, Andrew Kenningham, chief Europe economist at Capital Economics, said consumption by households had been “hit hard” by high prices and rising interest rates.

But it could have been worse, given the magnitude of the “shock” to incomes once they are adjusted for inflation, according to a tweet by Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

Inflation in the eurozone jumped last year when Russia’s full-scale invasion of Ukraine sent energy prices soaring. Although easing, it remains high, with overall consumer prices in May 6.1% higher than a year ago.

A sharp fall in government spending was another key driver of the decline in GDP early this year.

US economy out in front

Both the eurozone and the whole of the EU are now lagging the US economy. GDP across the Atlantic rose 0.3% in the first quarter after a 0.6% increase late last year, according to data from the Organisation for Economic Co-operation and Development. On an annualized basis, favored in the United States, its economy grew 1.3% in the January-March period compared with the previous quarter.

Earlier official estimates of the eurozone’s economic output pointed to a slight increase in the first quarter.

Thursday’s downward revision was mainly due to downgrades for Germany, Europe’s biggest economy, and Ireland, noted Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

German GDP fell 0.3% in the first three months of 2023, compared with an earlier estimate of zero growth, as last year’s energy price shock took its toll on consumer spending.

The evidence of a recession in the eurozone will complicate the task of the European Central Bank when it meets next week to set interest rates. Inflation is still more than three times the bank’s target, but raising rates further to cool it could hurt the economy.

“We think GDP is likely to contract again in [the second quarter] as the effects of monetary policy tightening continue to feed through,” Kenningham at Capital Economics said in a research note.