Revised figures set to show euro-zone economy is shrinking

The euro-zone economy is heading for symbolically important reversal on Thursday, when economists expect official growth figures to be downgraded to show output slightly contracted for the past two quarters.

The shift would take some shine off the recent performance of the euro-zone economy, which has done better than many economists feared when the bloc was hit by an energy and cost-of-living crisis triggered by Russia’s full-scale invasion of Ukraine last year.

The downgrade could also change the mood among policymakers at the European Central Bank (ECB), who are due to meet next week in Frankfurt. ECB rate-setters have pointed to the recent “resilience” of the euro-zone economy as a reason to keep raising interest rates.

“While these changes wouldn’t be a big deal from a macroeconomic perspective, at the margin they may change the narrative and discussion at the ECB council meeting,” said Oliver Rakau, an economist at research group Oxford Economics.

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Eurostat, the EU’s statistics agency, is due to publish a revised estimate of first-quarter gross domestic product in the 20-country single currency bloc on Thursday.

The latest figures from Eurostat show the bloc’s economy expanded 0.1 per cent in the first quarter from the previous quarter, having stagnated in the final three months of last year.

The Irish economy, as measured by gross domestic product (GDP), shrank by 4.6 per cent in the first quarter of this year on the back of a major contraction in the multinational-dominated industry sector, figures showed at the end of last week. Germany and Finland have also cut their estimates for first-quarter GDP growth since Eurostat’s initial estimate was published in late April.

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Mark Cus Babic, an economist at UK bank Barclays, told the Financial Times that a “mechanical aggregation” of the latest euro-zone GDP figures published by member states pointed to a likely downgrade into contraction for both quarters.

Barclays forecast a quarter-on-quarter decline of 0.1 per cent for both three-month periods, which would meet some experts’ definition of a recession.

But Mr Cus Babic said there was some uncertainty as “the growth rate that Eurostat reports for the euro area as a whole can deviate from the growth of the sum of the individual countries by a few basis points”.

“There is a high chance that the euro-zone economy has actually fallen into a winter recession after all,” said Carsten Brzeski, head of macro research at Dutch bank ING. “A contraction in the first quarter is highly likely and a downward revision to the fourth quarter is not impossible.”

He added that figures from the Netherlands were not included in Eurostat’s initial estimate, and these were likely to add to downward pressure after the Dutch statistics agency last month announced its GDP shrank 0.7 per cent in the first quarter.

Italy is one of the few countries to have upgraded its first-quarter GDP forecast, lifting it last week to 0.6 per cent growth, up from its preliminary estimate of 0.5 per cent. Holger Schmieding, chief economist at German bank Berenberg, said Italy’s upgrade may mean the euro zone stagnated rather than contracted in the first quarter. Greece is yet to report first-quarter GDP figures, which could also offset some of the gloom.

If the euro-zone economy shifts from slight growth to a mild contraction, it would make it harder for the ECB to “send a clearly hawkish message” especially after inflation fell more than expected last month at the headline and core level – which excludes energy and food prices – said Mr Rakau at Oxford Economics.

ECB president Christine Lagarde signalled a further rate rise was likely next week by saying on Monday that “price pressures remain strong” in the euro zone and economic activity “is being supported by lower energy prices, easing supply bottlenecks and fiscal policy support to firms and households”.

On Tuesday, economic data for the bloc at the start of the second quarter came in weaker than expected. Euro-zone retail sales stagnated in April, when economists had expected 0.2 per cent growth, while German factory orders for the same month fell 0.4 per cent, confounding forecasts of a 3.8 per cent increase. – Copyright The Financial Times Limited 2023