Eurozone slipped into a mild recession early in the year

According to a report by the European statistics agency, the eurozone entered a recession in early this year due to high energy and food prices. The European Central Bank faces a number of challenges as it tries to determine how best to curb high prices while not further harming the economy.

The growth in 20 countries that use the Euro currency decreased by 0.1% in the first quarter of this year, according to revised data. This follows a contraction of the exact same magnitude in the fourth quarter. This was the first contraction of six months in the eurozone, since the early days of the coronavirus epidemic. It is what economists refer to as a technical recession.

Consumers across Europe were thrown into a crisis of cost-of-living by stubbornly high inflation, which led them to cut back on their spending. In the eurozone, spending fell by 0.3% during the first quarter of this year. It had fallen 1% the previous quarter. Imports also fell sharply, as the demand for goods and service shrank.

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The public spending that soared in the pandemic lockdowns also saw a steep decline. It contracted by 1.6% in the first three months of the year.

The decline in the economy mirrors the contraction of Germany, the largest economy in the Eurozone, which reported last month that the data for the first quarter of the year indicated that the economy was in a recession due to the shock energy prices.

The report released on Thursday showed mixed results across the region. While the economies of southern Europe, including Spain, Italy, and Portugal, all experienced strong growth, Germany, the Netherlands, and France, only saw a mild increase.

The European Commission's growth forecasts have been revised upwards, with an expansion of 1.1% in this year, and 1.6% by 2024.

Claus Vistesen is the chief eurozone economist for Pantheon Macroeconomics. He wrote a note that stated: 'Looking forward, we believe consumers' spending has now recovered slightly, as inflation eases. We also think government expenditure will rebound.' This boost will likely be offset by continued investment declines and further inventory reductions, as a result of tightening credit criteria.

The governments hoped to prevent a recession by spending extravagantly in the winter to protect households and businesses against escalating energy and food prices, which were exacerbated due to Russia's conflict in Ukraine. The countries of Europe quickly stocked up energy reserves and the mild winter combined with massive conservation efforts helped to avoid the worst.

The strategy helped to drive down energy prices, and the inflation rate in the largest economies of the Eurozone has dropped from its record highs. In May, inflation in the eurozone was at 6.1%. This is the lowest rate for more than a month.

The price of food, and other services have continued to rise at a rapid pace. This increases the likelihood that the European Central Bank will continue to increase interest rates during its next meetings. The International Monetary Fund warned that the main challenge for European policymakers this year will be to control inflation without inciting a severe economic recession.

Analysts say that the economic downturn is mild and will not affect the recovery of the economy from the pandemic. However, it does signal that growth for the rest of the year will be tepid.

In a client note, ING Bank stated that it was difficult to argue this is a economic recession. The stagnation in the economy is a stark contrast to the recent boom that followed the pandemic.

The next meeting of the European Central Bank's monetary policy committee is scheduled for June 15th.