The eurozone entered a technical recession at the beginning of the year, as the 20-country bloc saw its economy shrink by 0.1 per cent for a second consecutive quarter, according to revised figures from the EU's statistic agency.
Eurostat's numbers, which had originally pointed to growth, showed contraction following the news that Europe's economic powerhouse, Germany, had slipped into recession.
Previously, Eurostat had estimated flat economic growth for the last quarter of last year and 0.1 per cent growth for the first quarter of 2023 – both quarters have now been revised to a 0.1 per cent contraction, meaning the eurozone entered a technical recession in January.
Eurostat's downgraded numbers is a blow to the recent perception that Europe's economies were faring reasonably well in the face of higher inflation, rising interest rates and the effects of the war in Ukraine.
The European Central Bank has raised interest rates by 3.75 per cent in just under a year, in its quest to quell rising inflation.
Falling forecasts
The European Commission forecast last month that the eurozone economy would grow by 1.1 per cent this year.
However, the latest figures from Eurostat have given economists pause for thought.
“Since the spring, all the data has been bad”, said Charlotte de Montpellier, an economist at ING Bank, who is now predicting that growth in the eurozone will be limited to 0.5 per cent this year.
“The European economy is in a phase of stagnation and has had difficulty getting through the winter because of the energy shock.”
Others expect the contraction of the eurozone's GDP will carry on through to the second quarter of this year, as higher interest rates hold back growth.
“GDP is likely to contract again in Q2 (the second quarter) as the effects of monetary policy tightening continue to feed through,” Capital Economics said in a note.
“Domestic demand has been hit hard by the combination of inflation and rising interest rates.”
At 6.1 per cent, the inflation rate in the eurozone remains far above the ECB's 2 per cent target, which prompted the Bank's president, Christine Lagarde, to hint that at least one rate increase should be expected.
The ECB's three key rates currently sit between 3.25 per cent and 4 per cent.