Euro-zone recession to drag on

The euro-zone has fallen into recession, albeit only by the finest of margins – the economy contracted by 0.1% q/q in both Q4 last year and Q1 this year. The consensus view is that the worst is now behind us and that growth will accelerate, presumably in part due to the huge drop in gas prices. By contrast, we forecast that the recession will drag on. We think that the boost from cheaper energy will be partly offset by tighter fiscal policy as governments rein in their support during the “cost of living crisis”. And the full impact of the ECB’s monetary tightening is yet to be felt. Meanwhile, we expect growth in the euro-zone’s key trading partners to be very weak, weighing on exports. As a result, our euro-zone GDP forecasts are a long way below the consensus. That said, we are forecasting a fairly mild recession that would lead to only a small increase in unemployment. This means that we expect underlying price pressures to ease only gradually over the next couple of years.

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