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The euro zone will avoid recession this year as economists’ gloom grows

The euro zone will avoid a recession this year, according to a widely watched survey of economists that illustrates the sharp turnaround in global economic sentiment over the past couple of weeks.

As recently as last month, analysts surveyed by Consensus Economics predicted the bloc would plunge into recession this year. But this month’s survey found they now expect growth of 0.1 percent during 2023. This is thanks to lower energy prices, bumpy government support and the earlier-than-expected reopening of the Chinese economy, which is set to boost global the demand.

The upgrade comes after officials and business leaders at this week̵[ads1]7;s annual World Economic Forum in Davos also embraced a more optimistic outlook, and the IMF signaled it would soon upgrade its forecasts for global growth.

Economists had feared that Europe would be among the hardest-hit areas of the global economy this year because of its exposure to the economic fallout from Russia’s war with Ukraine. Just weeks ago, IMF managing director Kristalina Georgieva said that “half of the EU will be in recession” by 2023.

Carsten Brzeski, head of macro research at ING Bank, described the turnaround in the economists’ forecasts as “a recession that never came”.

Susannah Streeter, analyst at Hargreaves Lansdown, said: “The threat of the dreaded energy crisis [is] withdrawal and inflation [is] climbing down faster than expected.”

Annual percentage change line chart, by forecast date showing economists have revised up their 2023 GDP growth forecast

“Our perceptions have changed quite radically since October,” said Andrew Kenningham, chief economist for Europe at Capital Economics, adding that government support had been more generous than expected, while the auto sector has rebounded more strongly than forecast.

There is now less than a 30 percent chance of a recession, down from an estimated 90 percent last summer, according to Anna Titareva, economist at UBS. She said the easing of supply chain disruptions, a strong labor market and excess savings explained the eurozone’s economic resilience, and Europe had succeeded in filling gas storage in recent months, greatly reducing fears of gas rationing.

The recent sharp drop in wholesale gas prices back to levels last seen before Russia’s invasion of Ukraine has also helped boost the economic outlook. JPMorgan this week raised its 2023 eurozone GDP forecast to 0.5 percent after expecting natural gas prices to be around €76 per megawatt hour, instead of the previous expectation of €155.

Line chart of the index, 2015=100 showing Eurozone industrial production was resilient, despite the rise in gas prices

Christine Lagarde, president of the European Central Bank, said in a speech in Davos this week that the economic forecast looked “much better” than feared. Gita Gopinath, the IMF’s deputy managing director, said China’s decision last month to ease Covid-19 restrictions was one reason the fund had become more optimistic.

Sven Jari Stehn, an economist at Goldman Sachs, said stronger demand in China would “significantly increase European trade, especially in Germany”.

German Chancellor Olaf Scholz said this week that he was “convinced” that Europe’s biggest economy would not fall into recession. Banque de France Governor François Villeroy de Galhau said: “For Europe, we should avoid a recession this year, which I would not have said with such confidence three months ago.”

Some economists still expect a recession. Silvia Ardagna, an economist at Barclays Bank, said that while the decline would not be as deep as previously thought, the eurozone economy would still contract for two consecutive quarters – in line with the technical definition of a recession.

Kenningham warned that aggressive rate hikes by the ECB could lead to a weak recovery.

Lagarde signaled in Davos that the ECB would raise interest rates by 50 basis points at its meetings in February and March. The deposit rate has already increased by 2.5 percentage points to 2 percent since June last year, a rate of tightening that eurozone economies have not experienced before.

“The eurozone economy can avoid a recession, but interest rates may have to stay high for a longer period,” Kenningham said. “It looks like we could have – at worst – a mild recession, but that will be followed by a slight recovery.”

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