Economic output shrunk by 0.1% in the first quarter while unemployment hit the lowest since the group’s formation
DATA POINT
All the 20 Eurozone countries slipped into recession in the first three months of 2023. The Eurozone’s GDP contracted by 0.1% in the first quarter following a decline of the same magnitude in the last three months of 2022. This fits the definition of a recession: two consecutive quarters of contraction in economic output. The Eurozone last slid into recession in 2020, the worst in its history. Chart 1 shows the percentage change over the previous quarter in GDP at market prices for the Eurozone.
Of the 20 countries, seven showed a contraction in GDP in the latest quarter. Germany, the largest economy in the Eurozone and roughly makes up 29% of the zone’s GDP, slid into recession as output shrank 0.3% in the first three months of 2023 following a 0.5% contraction in the previous quarter (Chart 2). Ireland recorded the steepest decline with its economic output shrinking by 4.6%. Other economies which saw the GDP decline include the Netherlands, Lithuania, Estonia, Malta, and Greece. In other key economies of the Eurozone — France, Italy and Spain — growth remained muted. Chart 2 shows the percentage change over the previous quarter in GDP at market prices for select countries.
The mild recession that the Eurozone faces is a result of a spike in the prices of food and energy following Russia’s invasion of Ukraine. As inflation soared to record highs, spending by households was hit hard. Overall inflation in October 2022 accelerated to 10.6%, the highest since 1999, the year the Eurozone was created (Chart 3). Inflation in gas and electricity also rose to record highs of 77.6% and 45.6%, respectively. Since then, inflation in gas and electricity decreased to 5.8% and 6.4%, respectively in April, but inflation in food items remained high at 15.1%. While overall inflation also decreased to 6.1% in May from the peaks observed in 2022, it remains far above the European Central Bank’s 2% target. Chart 3 shows the month-wise overall inflation, and inflation for food, gas, and electricity.
As Chart 4 shows, household spending fell by 0.3% following a 1% drop in the previous quarter. Household consumption expenditure refers to the expenditure made by resident households to meet their everyday needs such as food, clothing, housing (rent), energy, transport, durable goods (notably cars), health costs, leisure, and miscellaneous services.
The government’s final consumption spending, which remained high during the pandemic quarters, crashed in the first three months of 2023, shrinking by 1.6%. Government final consumption expenditure (GFCE) is the expenditure by general government bodies on services to the community such as defence, education, and public order and safety.
Finally, gross fixed capital formation (GFCF) or “investment” increased by 0.6% following a drop of 3.5% in the previous quarter. However, growth in GFCF alone could not offset the declines in household and government spending. GFCF consists of resident producers’ investments, in fixed assets during a given period. Chart 4 shows the percentage change over the previous quarter in household and government spending and GFCF.
However, unemployment levels in the eurozone stood at 6.5% in April 2023, the lowest since 2000. Bert Colijn, senior economist (Eurozone) at the Dutch financial institution ING wrote in a note dated June 8, “The decline of 0.1% in both the fourth and first quarters is so minimal though, and the labour market is so strong that it’s hard to argue that this is a recessionary environment.”
The Ukraine-Russia war fallout — Eurozone in recession https://epaper.thehindu.com/ccidist-ws/th/th_kochi/issues/39737/OPS/GDKBBVM3J.1.png?cropFromPage=true
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