Germany's second largest refinery of BP in Gelsenkirchen, western Germany, on Jan. 30, 2023. The European Union’s executive body raised its economic growth forecast, saying Europe had dodged a winter recession that was feared amid an energy crisis. But stubbornly high inflation is likely to keep hurting the economy by sapping people’s ability to spend. In a spring forecast Monday, May 15, 2023 the European Commission says it expects improved economic growth of 1.1% this year. (AP Photo/Martin Meissner, File)
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 as the European Central Bank hikes rates 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. But the Organization for Economic Cooperation and Development said this week that it expects meager growth of 0.9% in the euro area in 2023.
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.
In the United States, economic growth has slowed to a lackluster 1.3% annual rate from January through March, but consumer spending has risen and the job market is hot. Most economists don’t think the U.S. is headed for a recession anytime soon, and if one occurs, it’s likely further away than many of them had previously thought.
In Europe, the economic crunch came as Russia's war in Ukraine set off an energy crisis last year. Moscow cut off most of its natural gas exports to the continent, which relied on those supplies to generate electricity, power factories and heat homes.
Energy bills spiked for households and businesses, inflation soared to record levels, and there is increased anxiety over potential rationing and blackouts. Governments and utilities were able 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 meant to combat inflation have weighed on economic growth by making credit for house purchases or business expansion more expensive.
The European Central Bank is expected to continue its series of rate increases at its June 15 meeting and keep the door open to raise further beyond that.
ECB President Christine Lagarde this week stressed the need to bring down inflation — which eased to 6.1% in May but is still triple the bank's goal of 2% — because it is a strain on 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 in the first quarter, falling 4.6%, followed by Lithuania dropping 2.1% and the Netherlands down 0.7%.
The Euro Area Business Cycle Dating Committee said there had been “no recession” in its last update, which was released March 27 and only dealt with data through the end of last year.
It said falling consumer spending was statistically offset by a large reduction in imports and that “the output growth pause contrasts with a continued, robust expansion in employment.”
McHugh reported from Frankfurt, Germany. Sacha Bianchi contributed from Paris.
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