Europe's economy shrank. For households that are hurting, it's just numbers

By AP News

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The European economy has contracted slightly at the end of last year and beginning of 2023

Europe Economy

LONDON (AP) — The European economy contracted slightly at the end of last year and beginning of 2023, revised figures showed Thursday, underlining the impact of the loss of Russian natural gas and high inflation on consumer spending.

Economic output in the 20 countries that use the euro currency dropped 0.1% in both the final three months of 2022 and first three months of this year from the previous quarters, according to the European Union’s statistics agency Eurostat.

That means the eurozone endured two consecutive quarters of decline, which is one definition of recession often used in political and economic discussions, dubbed a “technical” recession.

However, the economists on a panel that declares eurozone recessions use a broader set of data, including unemployment figures. And European labor markets have held up to recent economic shocks: Unemployment is at its lowest level since before the creation of the euro in 1999, hitting 6.5% in April.

The small shift in numbers doesn’t change what households already are experiencing: rising prices at the grocery store, paying more interest on their mortgages and struggling for wages that keep up with the rising cost of living.

“Maybe before I used to buy more products I didn’t need, like potato chips for example,” Milo Taneron, a 26-year-old youth social worker, said while shopping in a Paris supermarket recently.

“Now, for certain products, I’ve been forced to buy from low-cost brands, to drop down a level to be able to buy these products,” Taneron said.

With inflation and high interest rates hitting households hard and forcing them to cut back on spending, some analysts say they expect the economy to contract further this year.

Even so, Bert Colijn, senior eurozone economist for ING bank, said “it’s hard to argue that this is a recessionary environment” because the decline was so small and job market is so strong.

“Overall, the eurozone economy is very much back to muddling through,” he said in a note.

The last update from the euro area business cycle dating committee, which was released March 27 and only dealt with data through the end of last year, said there had been “no recession,” with falling consumer spending statistically offset by a large reduction in imports.

The committee added that “the output growth pause contrasts with a continued, robust expansion in employment.”

The economic crunch came as an energy crisis engulfed Europe last year. Its support for war-torn Ukraine led Russia to cut off most of its natural gas, which the continent relied on to generate electricity, power factories and heat homes.

That fueled sharply higher energy bills for consumers and businesses, spiked inflation to record levels, and raised fears of rationing and blackouts. Governments and utilities scrambled to line up alternative supplies of liquefied natural gas from countries like the U.S. and Qatar, avoiding disastrous utility shutoffs that had been feared last year.

Energy prices have since fallen to levels seen before Russia invaded Ukraine, but persistent inflation and higher interest rates that the European Central Bank is using to combat price spikes have weighed on economic growth by making credit for house purchases or business expansion more expensive.

The ECB is expected to continue its series of rate increases at its June 15 meeting, with a quarter-point hike, and keep the door open to raise further beyond that.

Bank President Christine Lagarde this week stressed the need to bring down inflation — which eased to 6.1% in May but is still above the ECB's goal of 2% — because it is straining everyday people.

Her comments followed recent figures from Germany showing that Europe’s biggest economy unexpectedly shrank in the first three months of this year, marking its second quarter of contraction.

Ireland’s gross domestic product — the total output of goods and services — declined the most in the eurozone at the beginning of the year, falling 4.6%, followed by Lithuania dropping 2.1% and the Netherlands down 0.7%.

Eurostat previously estimated that the eurozone didn’t expand in the fourth quarter of 2022 and saw scant 0.1% growth in the first quarter of this year.

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McHugh reported from Frankfurt, Germany. Sacha Bianchi contributed from Paris.

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Author: AP News

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