by Michalis Psylos

 

 

Things are looking even better for the eurozone economy as a whole. Again, January saw the third rise in the composite S&P Global Composite Purchasing Managers Index (PMI) and a 7-month high,at 50.2 points (+0.9 from the previous month). However, the growth limit has already been crossed. Experts expected only a value of 49.8 points.

 

The reason for the increase is the services sector of eurozone with 50.7 points, marking growth for the first time in six months (December: 49.8). Meanwhile, manufacturing continues to rising to 48.8 from 47.8.

 

Negative factors such as inflation and supply shortages tend to decrease further (average delivery times have dropped significantly for the 3rd month in a row). In terms of inflation, it should be noted that sales prices of goods and services, are slightly accelerating in the euro area in January, due to higher costs and wage growth. Therefore, companies are still trying to secure their profit margins through higher prices.

 

“Eurozone can probably avoid a recession as a result of the conflict in Ukraine and the energy crisis. In addition, the outlook for companies and consumers has also improved significantly,” this is the assessment of economists from DB Research, the research unit of Deutsche Bank, in their new economic outlook “Focus Europe”.

 

Under the headline “Recession? What recession?”, economists refer to the surprisingly good growth of the economy from late summer 2022. The main reason for this is that Europe has brought the energy crisis under control. "The shops are full. Gas prices are falling. Inflation is falling and uncertainty is decreasing,” the authors summarize the best-case scenario.

 

They forecast significantly better economic growth for Europe with lower inflation than previously expected. However, the European Central Bank (ECB) will raise the key rate even more because price inflation threatens to stabilize at a high level.

 

 

Deutsche Bank raises its forecast for economic growth by a full percentage point. "Given all the circumstances, even stagnation would be a remarkably resilient performance," the economists write. There is a headwind from the predictable recession in the US and the consequences of interest rate hikes by the ECB. But China's opening and recovery will help Europe create more than stagnation. “China's economy is likely to regain momentum in 2023”, says Chi Lo, Asia-Pacific market strategist at BNP Paribas Asset Management. He sees opportunities for investors in the country. Now, at the start of the Year of the Rabbit, Chinese government abandoned its rigid zero-Covid policy late last year. This is good news for the economy – domestically and globally. "As the Chinese economy reopens, we expect disruptions to global supply chains to ease," said Chi Lo.

 

European Commissioner for the Economy, Paolo Gentiloni sent optimistic messages: "We have managed to reduce energy dependence, energy prices have come down significantly and inflation peaked at the end of last year in Europe, so there is an opportunity to avoid a deep recession and perhaps enter a more limited and shallow contraction," he argued.

 

Goldman Sachs economists forecast a slight pick-up in the first quarter. For 2023 as a whole, Goldman Sachs economists expect eurozone GDP to grow by 0.6%, compared to a previous forecast of a 0.1% decline.

 

 

Beyond China`s reopening, there are other two main reasons that support the more optimistic forecast: The first is that the industrial sector is showing great resilience. The second is that natural gas prices are falling drastically, below 55 euros per MWh.

 

Mario Centeno, member of the Governing Council of the European Central Bank, emphasized that the eurozone economy is doing better than many expected due to high inflation and the energy crisis. "The economy has surprised us quarter after quarter," he said. "The fourth quarter in Europe will probably be positive. Perhaps we will be surprised even in the first half of the year". But the president of the Eurogroup, Pascal Donahue, has long argued that the eurozone is in a very resilient position and is likely to avoid recession this year, even with very low growth.

 

Could these considerations lead to a less restrictive ECB policy? "Let's hope this happens", say European financial circles in Brussels to Naftemporiki.gr. "The price of natural gas has dropped significantly and so has the cost of energy. This was helped by the relatively mild winter we are experiencing," the same sources emphasize. Within the ECB, however, opinions differ: Olli Rehn, the Finnish central banker and member of the Governing Council, claims that monetary policy should be tightened even more: "Key interest rates should be raised significantly to ensure a timely return of inflation to the medium-term target of 2%," the governor of Finland's central bank tweeted.