Eurozone Economy Flatlines, Raising Concerns About Falling Behind

The eurozone economy stagnated late last year as a lingering energy crisis sparked a loss of competitiveness in some European industries, and consumers reined in spending to grapple with high living costs, Europe’s statistics agency reported Tuesday.

But economists believe the worst may be over, as the European Central Bank continues its campaign to wring out inflation without plunging the eurozone economy into a deep downturn.

Economic output in the 20 countries that use the euro currency grew at zero percent in the last three months of 2023 versus the previous quarter, after contracting in the third quarter, narrowly avoiding a recession. Compared with a year ago, the eurozone grew by just 0.1 percent.

The anemic pace is keeping Europe far behind the United States, where the economy, although slowing from a breakneck growth pace, continues to be powered by consumer spending. Aggressive interest rate increases by the Federal Reserve have brought a slowdown in inflation, and the Fed is expected to begin unwinding those increases soon.

“The gap in economic activity between the U.S. and eurozone is widening significantly at the moment,” said Bert Colijn, chief eurozone economist at ING Bank. “Part of this is structural as the eurozone faces a loss of competitiveness on the back of structural changes in the economic environment since the war in Ukraine and energy crisis.”

In Europe, businesses have been forced to raise wages in the last year to help workers and consumers keep up with high costs. That has added to the challenges facing policymakers at the E.C.B., who, like the Fed, had ratcheted up interest rates to curb the rise in prices before recently pausing their campaign.

Inflation in recent months has fallen rapidly from the record highs of a year ago — though not yet enough to fully negate the pain for households and manufacturers. Even so, the eurozone economy hasn’t fallen off a cliff, and there are signs that the E.C.B.’s campaign is starting to pave the way for a modest recovery this year, economists said.

“While growth prospects for this year are more positive, output is starting from a low base and the pickup will be gradual,” said Rory Fennessy, Europe economist at Oxford Economics in London. Even so, he added, “we anticipate fading headwinds in Europe to support a recovery in growth throughout 2024,.

Europe’s biggest problem right now is Germany. Long the powerhouse of Europe, its manufacturing-intensive economy has slumped amid industrial rivalries with China and the scourge of high energy costs. The German economy shrank 0.3 percent in the fourth quarter, after flatlining in the previous two quarters.

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

France, the bloc’s second biggest economy, failed to expand in the fourth quarter amid a fall in consumption and slowdown in investment.

Growth, however, has been more robust in major countries along Europe’s southern rim, including Spain and Portugal, revealing a European economy that appears increasingly to be operating at two speeds. The Spanish economy grew by 0.6 percent from October to December, driven by a tourism boom, while Portugal’s expanded by 0.8 percent.