20-nation Eurozone dips into recession, economy shrinks by 0.1% in Jan-March

The euro area suffered the mildest possible recession during the winter after Russia’s war in Ukraine sent energy prices soaring.

The 20-nation economy shrank by 0.1% between January and March, revised data showed Thursday, adding to a fourth-quarter decline of the same magnitude and resulting in the first six-month contraction since the Covid-19 pandemic.

Analysts polled by Bloomberg had estimated output stagnated at the start of the year.

The outcome will come as a blow after politicians and European Central Bank officials said repeatedly that a downturn could be averted even as inflation rocketed to its highest level since the euro was introduced.

But policymakers will take heart that their billions of euros in aid for households across the bloc meant that fears of much more severe economic damage in the wake of Russia’s invasion didn’t come to pass.

With growth probably having returned this quarter, governments are set to continue rolling back fiscal support. The ECB is also unlikely to change tack as it nears the end of its historic campaign of interest-rate hikes and considers defeating inflation a pre-requisite for sustainable economic expansion.

The euro area’s first-quarter weakness was down to a drop in government and household spending, according to Eurostat. Inventories made a negative contributions, while trade supported output.

The data follow German numbers revealing that Europe’s biggest economy also endured a winter recession, as did Greece and Ireland, while Estonia hasn’t grown since the end of 2021. Another three euro-area countries — Lithuania, Malta and the Netherlands — also contracted in the first quarter.

The outlook has since improved. The European Commission boosted its outlook for the region last month and now predicts gross domestic product will advance 1.1% this year and 1.6% in 2024.

There are also positive signs on inflation. While price gains remain three times the 2% target, the headline and underlying measures both retreated more than anticipated last month, and consumers’ expectations are also moderating.

That won’t stop the ECB raising its deposit rate by a quarter-point to 3.5% next week.