Eurozone Enters Into Recession, Shrunk By 0.1%: Eurostat

The eurozone has officially entered a technical recession, with a consecutive 0.1 per cent contraction for the second quarter in a row at the beginning of the year, according to the Eurostat statistical agency.

Eurostat revised its earlier forecast of slight growth after Germany announced last month that it had fallen into a recession. The worse-than-expected figures are a result of curbed demand in Europe's largest economy due to inflation and higher interest rates. 

Eurostat downgraded its previous predictions of 0.1 per cent growth in the final quarter of 2022 and 0.2 per cent growth in the first quarter of 2023 to 0.1 per cent contractions in both periods. Meeting the threshold for a technical recession, this decline follows a challenging year for European economies due to surging energy prices caused by Russia's conflict with Ukraine, which led to spiralling inflation. 

To address the situation, the European Central Bank has raised its key rates by 3.75 percentage points since commencing a unique monetary tightening campaign in July of the previous year. 

These latest figures cast doubt on more optimistic predictions for the entire year of 2023. The European Commission had forecasted in mid-May that growth for the year would reach 1.1 per cent across the 20 countries using the euro. However, economist Charlotte de Montpellier from ING Bank predicts that the figure for 2023 will only reach 0.5 per cent. 

Experts point to a string of negative data since spring, highlighting the impact on German industrial production and new orders. The European economy is currently experiencing stagnation and has faced difficulties during the winter due to the energy shock caused by rising prices. 

Although gas and oil prices have decreased in recent months, last year's price surge significantly affected household confidence and led to reduced consumption. 

Capital Economics believes that GDP is likely to contract again in the second quarter (Q2) as the effects of monetary policy tightening continue to affect the economy. Domestic demand has suffered greatly due to a combination of inflation and rising interest rates. 

Headline inflation for the 20 EU countries using the euro dropped to 6.1 per cent in May but remains well above the ECB's target of 2.0 per cent. ECB chief Christine Lagarde has expressed concern over high inflation and has hinted at a potential smaller rate increase in the future. 

The news of the technical recession could put pressure on the central bank to postpone further tightening measures. Additionally, Europe's economic woes are compounded by a slowdown in the United States and a weaker-than-expected recovery in China, which are impacting exports.