Eurozone avoids recession despite Germany shrinking and France stagnating; company insolvencies in England and Wales hit 30-year high – business live

Ireland’s GDP readings can be volatile due to the large multinationals based in the Republic, and isn’t really a good tracker of its econony.

The eurozone’s refusal to fall into recession (yet, anyway) takes some pressure off the Euroepan Central Bank as it assesses when would be safe to start cutting interest rates.

Alex Livingstone, head of FX and trading at Titan Asset Management, says:

“The Q4 2023 growth numbers for the Euro Area revealed stagnant 0% growth, surpassing the -0.1% consensus for the quarter.

Because growth isn’t crumbling under the pressure of higher rates like some thought it might, this latest data print will buy [Christine] Lagarde some more time for inflation to return to the ECB’s 2% target before cutting rates.

It’s not all doom and gloom for the eurozone, insists Michael Field, European market strategist at Morningstar:

Field points out that growth among Europe’s peripheral countries helped the eurozone avoid a recession, while the Big Two members struggled.

Here’s his take on this morning’s GDP data:

“Euro area GDP was flat in the last quarter of 2023, coming in better than expectations of a 0.1% fall. This means that for the entire year, growth in the euro area economy was essentially steady. There are two ways to look at this. On the negative side, 2023 was effectively a dead year with zero growth, but on the positive side, despite record high interest rates and high inflation levels not seen since the 1970’s, the euro area economy successfully managed to avoid a recession.

“A rebound in the peripheral economies of Belgium, Spain, and Portugal, registered the highest level of growth at 0.8% in the fourth quarter. While not blistering, this growth helped mitigate depressed growth in Europe’s two powerhouse economies of Germany and France.

“Lack of growth in the euro area contrasts uncomfortably with the over 3% growth in the US over the same period. The negative implication of this is that it makes regional investment decisions for international firms all that much easier to make, with Europe looking much less attractive at this point in time. This situation is reflected in economic sentiment readings released today, which declined month on month.

“However, it’s not all doom and gloom in Europe. Inflation is within touching distance of central banks’ targeted levels, meaning interest rates should decline over the course of this and next year. This brings much welcome relief to businesses and indeed consumers’ pockets.”

Today’s data shows that the eurozone fell further behind the United States at the end of last year.

Data last week showed that US GDP rose by an annualised rate of 3.3% in Q4, which means a quarter-on-quarter increase of around 0.8%. Rather more impressive than the eurozone’s 0% growth.

That means the US grew as fast as the quickest-growing eurozone country in Q4, Portugal.

We find out next month how the UK performed in Q4.

The broad picture is that the eurozone has stagnated over the last year.

GDP rose by just 0.1% in both Q1 and Q2 2023, before shrinking by 0.1% in the third quarter and stalling (as we just learned) in Q4.

The eurozone economy “escaped recession by the skin of its teeth” by the end of 2023, says Diego Iscaro, head of Europe economics at S&P Global Market Intelligence

Iscaro also fears thar that eurozone will struggle to grow in the first half of this year, after stagnating in the final quarter of 2023.

He explains:

Declining activity in Germany was offset by stronger than expected growth in Spain, while the French economy stagnated.

The outlook for 2024 continues to be challenging amid faltering demand and increasing geopolitical tensions. The expected fall in inflation should help to support households’ finances, although this positive impact will be at least partly offset by less supportive fiscal conditions. Similarly, we expect labour market conditions to gradually become less positive, although we currently project a modest increase in the unemployment rate this year.

All in all, we think that eurozone activity will remain virtually stagnant during the first half of 2024.

Among the eurozone member states for which data are available so far, Portugal (+0.8%) recorded the highest growth in Q4 compared to Q3, followed by Spain (+0.6%), Belgium and Latvia (both +0.4%).

Declines were recorded in Ireland (-0.7%), Germany and Lithuania (both -0.3%).

The year on year growth rates were positive for six countries and negative for five, Eurostat adds.

Eurozone narrowly avoids technical recession

Nick O’Reilly, restructuring and recovery director at accountancy firm MHA, predicts there will be more large administrations in 2024:

Following the news that England and Wales saw the most company insolvencies since 1993 last year, O’Reilly says:

“Throughout 2023 we saw a steady rise in the number of reported corporate and personal insolvencies which we saw reflected on the ground in our work. This growth has been primarily driven by smaller businesses having difficulty paying back government COVID support leading to an uptick in the number of Creditor’s Voluntary Liquidations.

“However, as we head further into 2024, we are likely to see more large-scale administrations compared to 2022 and 2023, as the impact of high interest rates begins to bite even further. This year is likely to be the busiest 12 months for insolvencies since 1993 as similar challenging conditions to 2023 will prevail — ongoing conflicts in Ukraine and the Middle East, falling house prices, still low levels of consumer confidence — combined with the lack of availability of interest payment holidays. This is highly likely to lead to some high-profile casualties.”

England and Wales see most company insolvencies since 1993

Back in the UK, there’s a small pick-up in the number of mortgages being agreed.

The Bank of England reports that 50,500 loans for house purchases were agreed in December, up from 49,300 in November.

And in a boost to borrowers, the ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages fell by 6 basis points to 5.28% in December.

This is the first drop since November 2021.

The GDP data keeps coming… with Portugal reporting that its economy grew by 0.8% in the last quarter of 2023.

Statistics Portugal adds that GDP grew by 2.2%, year-on-year, in Q4 2023, explaining:

The contribution of domestic demand to the year-on year growth rate of GDP remained high in the fourth quarter, with an acceleration in private consumption and a slowdown in investment.

The contribution of net external demand to the year on-year rate of change of GDP became positive, with Exports of Goods and Services in volume increasing more intensely than Imports.

Germany’s economy remains stuck in “the twilight zone between recession and stagnation”, says Carsten Brzeski, ING’s global head of macro.

Following the news that Germany shrank by 0.3% in October-December, Brzeski argues that the country is probably in a shallow recession:

The year 2023 was the first full year since 2020 in which the German economy contracted (by -0.3% year-on-year). The GDP numbers from previous quarters were revised.

As a result, the German economy has just avoided a technical recession (ie two consecutive quarters of contraction). But with an average quarterly growth rate of 0% QoQ since the second quarter of 2022, the German economy is anything but fast-growing.

The best way to describe the state of the German economy is probably that it is in a shallow recession. In fact, the economy remains stuck in the twilight zone between recession and stagnation.