Eurozone dodges recession but struggles to grow

Quarterly Market Overview Q3 2023 | Europe (excluding UK)

Investors had some positive economic news to digest early in the period when eurozone GDP for the first quarter of 2023 was revised upwards to 0.1% growth from an initial estimate of a -0.1% fall. This meant that the eurozone economy had narrowly missed entering a technical recession which is when two consecutive quarters of falling GDP occurs. However, for the second quarter, a preliminary estimate of 0.3% growth was subsequently revised down to -0.1%, largely due to weaker external demand and increased imports. Additionally, a lower level of consumer confidence held back recovery in the region’s economy. 

Interest rate rises continued to be the order of the day for the European Central Bank (ECB). It implemented a 0.25% hike in July to take the deposit rate to 3.75%, followed by another 0.25% rise in September, taking the rate to a record 4%. Not unlike other major central banks, ECB policymakers said they were following a meeting-by-meeting approach to deciding their next move. This made the situation frustrating for investors who have to rely on ‘signals’ given by central bank officials as the main indicators of what might happen next. The ECB’s strategy of higher interest rates to bring down inflation appeared to be making some inroads however, and Eurozone annual inflation moderated to 5.3% in July from 5.5% in June, and subsequently to 5.2% in August. Core inflation, which excludes volatile energy and food prices, also eased slightly. Although this gave the ECB some room to consider pausing its interest rate hikes, the central bank remained concerned that there was still some way to go before it could become more relaxed about inflation levels. In fact, the ECB raised its projection for average eurozone inflation to 5.6% in 2023 and 3.2% in 2024 against its target of 2%. 

Higher consumer prices dampened the mood of consumers during the quarter and the European Commission’s measure of both economic sentiment and consumer confidence remained below their long-term averages. Meanwhile, the European Commission painted a downbeat picture for future economic growth. Its Summer 2023 Economic Forecast downgraded eurozone economic growth to 0.8% from its previous prediction of 1.1% growth. The outlook for 2024 was similarly redrawn from 1.6% to 1.3% growth with the impact of high inflation and interest rates expected to linger into next year.

Our view

Introduction: Inflation still challenges the interest rate outlook United Kingdom: Weather puts a dampener on economic picture United States: Economy remains resilient while underlying inflation falls Asia (excluding Japan): China’s faltering economic recovery prompts policy easing Emerging markets: Emerging market performance mixed given economic uncertainties Japan: Easing prices support more positive economic outlook Outlook: The macro economic outlook is not the only consideration All of the articles in the series are also available to download in a PDF.

We have a neutral outlook for Developed Europe (excluding UK) equities. European natural gas prices, having earlier this year fallen sharply from the highs of last year, are providing some relative relief for both businesses and households. Additionally, the hope is that China’s economic stimulus efforts alongside a continued resilient US demand picture can over time help to feed into European export-led economic growth prospects. Despite challenging near-term economic data, the European Central Bank (ECB) in September continued to forecast positive annual average Real GDP growth across the euro area for 2023, 2024 and 2025. Supporting value-investment-style exposures added earlier this year, the region’s banks are expected to see an improved profit outlook medium term given a backdrop of positive nominal interest rates versus the hitherto decade of arguably lost-earnings under the ECB’s prior negative interest rate regime. While structural tensions between euro area monetary union versus fiscal and political sovereignty remain, these concerns are now balanced by the relatively more constructive medium-term outlook and valuations that we see.