The Eurozone economy is stalling, raising concerns about falling behind

The eurozone economy stagnated late last year as a protracted energy crisis led to a loss of competitiveness in some European industries, and consumers reined in their spending to combat high living costs, the European Statistics Agency said on Tuesday.

But economists think the worst may be over as the European Central Bank continues its campaign to reduce inflation without plunging the euro zone economy into a deep slump.

Economic output in the 20 countries that use the euro grew by zero percent in the last three months of 2023 compared to the previous quarter, after contracting in the third quarter, narrowly avoiding a recession. Compared to a year ago, the eurozone grew by only 0.1 percent.

The anemic pace leaves Europe lagging far behind the United States, where the economy, even as it slows from breakneck growth rates, is still driven by consumer spending. Aggressive rate hikes by the Federal Reserve have led to a slowdown in inflation, and the Fed is expected to begin phasing out these hikes soon.

“The gap in economic activity between the US and the eurozone is currently widening significantly,” said Bert Colijn, chief eurozone economist at ING Bank. “Some of this is structural, as the eurozone faces a loss of competitiveness due to structural changes in the economic environment since the war in Ukraine and the energy crisis.”

In Europe, companies have been forced to raise wages in the past year to help workers and consumers cope with high costs. That has compounded the challenges facing policymakers at the ECB, which like the Fed had raised rates to curb price growth before recently halting their campaign.

Inflation has fallen rapidly in recent months from record highs a year ago – but not yet enough to completely erase the pain for households and manufacturers. Still, the eurozone economy has not fallen off a cliff, and there are signs that the ECB's campaign is starting to pave the way for a modest recovery this year, economists said.

“While the growth outlook for this year is more positive, output is starting from low levels and the recovery will be gradual,” said Rory Fennessy, Europe economist at Oxford Economics in London. Still, he added, “we expect headwinds in Europe to ease to support a recovery in growth in 2024.

Europe's biggest problem at the moment is Germany. Long Europe's powerhouse, its manufacturing-intensive economy has collapsed due to industrial rivalry with China and the scourge of high energy costs. The German economy shrank by 0.3 percent in the fourth quarter, after leveling off in the previous two quarters.

The German economy remains stuck in “the twilight zone between recession and stagnation,” said Carsten Brzeski, head of global macroeconomics at ING.

France, the bloc's second-largest economy, failed to grow in the fourth quarter due to a drop in consumption and a slowdown in investment.

However, growth has been more robust in the major countries along the southern edge of Europe, including Spain and Portugal, showing that the European economy increasingly appears to be operating at two speeds. Spain's economy grew 0.6 percent from October to December, driven by a tourism boom, while Portugal's grew 0.8 percent.