Eurozone Outlook improves, but not enough to avoid a contraction

A string of positive high-frequency data and an upside surprise in the flash GDP estimate for Q4 2022 have prompted us to raise our eurozone growth forecast. Economic growth has managed to stay above expectations, and with the easing in gas and oil prices, the most severe downside risk has been removed. That said, our baseline still features a contraction in Q1, and the recovery in H2 could underwhelm if the impact of monetary tightening turns out stronger.

What you will learn:

• We assess how the economic downturn is playing out in different areas of the eurozone economybased on high-frequency data. On the whole, consumer spending is moving broadly in line withour initial forecast. We still think private consumption will see two quarterly drops as households grapple with the fall in real incomes, but improving confidence gives cause to some optimism.
• The labour market continues to shine. Despite slowing activity, unemployment rate rates remains at historic lows. Moreover, high-frequency data show that even if some deterioration is inevitable, it’s likely to be small. But while this is a positive for consumer spending, it will bolster ECB hawkish stance.
• Industry has also surprised to the upside, although it won’t escape a contraction over the winter. So far, it has beaten our forecast, thanks to easing bottlenecks, high backlogs, and lower energy global demand.