Euro zone exits recession but inflation remains sticky

The euro zone has rebounded from a shallow recession with the big four economies of Germany, France, Italy and Spain recording stronger-than-expected growth in the first quarter of 2024.

After back-to-back quarters of contraction in the second half of 2023, Eurostat figures showed gross domestic product (GDP) across the single currency area rose by 0.3 per cent in January, February and March.

The modest 0.3 per cent lift was still the strongest level of growth recorded since the third quarter of 2022, a reflection of the impact Russia’s war in Ukraine and the energy price shock has had on Europe’s economy.

The positive growth picture was slightly soured, however, by the latest inflation numbers showing consumer prices rose at an annual rate of 2.4 per cent in April, unchanged from the previous month and slightly ahead of analyst predictions.

Inflation in the services sector had the highest annual rate in April of 3.7 per cent compared with 4 per cent previously, while energy prices fell at an annualised rate of 0.6 per cent.

ECB policymakers have been concerned about the elevated levels of price growth in the services sector linked to increased wage demands as workers seek a “cost of living catch-up”.

The stronger-than-expected inflation numbers, while unlikely to derail an expected European Central Bank (ECB) interest rate cut in June, will make policymakers wary. Inflation in the US remains stubbornly high despite slowing late last year, so much so that expected rate reductions from the US Federal Reserve have been put on hold.

While Frankfurt, as predicted, kept rates unchanged earlier this month its official policy announcement explicitly mentioned the possibility of cutting rates for the first time in the current cycle. This was seen as almost locking in a rate cut at its next meeting.

High inflation, rising interest rates and weak global demand had triggered a contraction in GDP in the second half of 2023 but the latest figures suggest a modest recovery is now taking hold.

Driving the lift was the German economy, which accelerated by 0.2 per cent quarter-on-quarter on the back of increased construction output and rising net exports.

The likely start of monetary easing by the ECB should also provide extra impetus from June.

“The slight GDP expansion at the beginning of the year might be the starting point for a gradual recovery in the coming quarters. Plagued by cyclical and structural factors, however, the German economy is unlikely to develop great dynamism anytime soon,” economist Martin Ademmer said.

Central Statistics Office (CSO) figures published on Monday indicated the Irish economy also returned to growth in the first quarter of 2024 as activity in the State’s multinational-dominated technology sector increased. According to preliminary data from the CSO, gross domestic product (GDP) rose by 1.1 per cent in January, February and March when compared with the previous three months.

GDP had contracted for the five previous quarters largely because of a fall-off in exports, placing the Irish economy in a technical recession.