Resilient eurozone economy seen avoiding recession this year

ECB officials say monetary policy must be tightened further to tackle underlying price growth

GDP is now expected to increase 0.6% this year, compared with an earlier forecast for a contraction of 0.1%. Picture: Larry Cummins

Economists at Goldman Sachs no longer predict a eurozone recession after the economy proved more resilient at the end of 2022, natural gas prices fell sharply, and China abandoned Covid-19 restrictions earlier than anticipated.

GDP is now expected to increase 0.6% this year, compared with an earlier forecast for a contraction of 0.1%. While growth will still be weak during the winter due to the energy crisis, the first quarter of 2023 will likely see expansion of 0.1%, according to economists led by Jari Stehn. 

They also see inflation easing faster than thought — to about 3.25% by the end of 2023. 

“We also look for core inflation to slow due to cooling goods prices but see continued upward pressure on services inflation due to rising labour costs,” they said. 

“Given more resilient activity, sticky core inflation, and hawkish commentary, we expect the European Central Bank to tighten significantly more in coming months.”   

Goldman reiterated its call for half-point increases in interest rates at the ECB’s February and March meetings, followed by a final quarter-point step in May to take the deposit rate to 3.25%. 

Borrowing costs

Meanwhile, ECB executive board member Isabel Schnabel said borrowing costs must be lifted much further, with inflation only just having dipped back into single digits.

“Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target,” she said. 

“Inflation will not subside by itself,” Ms Schnabel told a conference in Stockholm. 

Despite headline inflation coming off eurozone highs in recent months, ECB officials are adamant that monetary policy must be tightened further to tackle underlying price growth that quickened to a record in December. 

A stronger than expected eurozone economy is also boosting their case. 

Ms Schnabel pushed back against complaints that higher borrowing costs complicate Europe’s green transition by making the necessary investments pricier.

“While a higher cost of credit will make the financing of renewable energies and green technologies more expensive, it would be misleading to use higher interest rates as a scapegoat for a further delay in the green transition,” she said. 

Ms Schnabel also flagged a potential shift in stance on how the ECB can contribute to greening the economy. 

• Bloomberg