The Eurozone is expected to experience a deep recession and a slow and difficult recovery

Schmieding said real GDP (adjusted for inflation) in the euro area would shrink sharply in the fourth quarter and first quarter of next year, with a cumulative decline of 1.7%. A recession is defined as two consecutive quarters of decline.

Preliminary growth estimates for the region point to a slowdown in the third quarter versus the previous quarter, from 0.8% to 0.2%. In Belgium, Latvia and Austria, an economic recession was observed in the last quarter.

“I wouldn’t call it superficial, it will certainly be deeper than the ECB was [European Central Bank] The board is expecting it,” BNP Paribas chief European economist Spiros Andriopoulos told CNBC earlier this month.

The European Central Bank is gradually starting to recognize the possibility of a recession in the region. The president of the European Central Bank spoke earlier this month Christine Lagarde He underlined that “the risks of a recession have increased”.

However, annual growth forecasts released by the central bank do not yet predict economic contraction across the bloc. They currently indicate a GDP rate of 3.1% this year and 0.9% in 2023. Updated figures are expected to be released next month.

“I see the danger [the recession] It could continue into the second quarter as well [of 2023]Andreopoulos said, citing the energy crisis and tighter monetary policy.

There is a clear risk that mid-winter temperatures, hitherto moderate for this time of year, will fall sharply in early 2023. Additionally, the European Central Bank has raised interest rates three times this year and is expected to continue. A sharp rise in interest rates can stifle economic growth while raising the cost of borrowing.

Morgan Stanley expects the eurozone to contract by 0.2% next year, while Germany, traditionally the eurozone’s economic powerhouse, will face one of the sharpest declines with -0.7%.

“The natural gas market remains tense and prices are expected to remain high. Fiscal support is substantial, but inflation affects corporate income and the real income of households, reducing investment and consumption. Monetary policy tightens financial conditions, which increases the capital spending slowdown,” analysts said. in the investment bank said.

Even if the eurozone emerges from recession in the first quarter of next year, economists say the coming months will remain difficult.

“I expect the recovery to be slow,” Marco Valli, UniCredit’s chief European economist, told CNBC on Tuesday, naming rising interest rates as one of the main factors preventing a strong rebound.

When asked if the eurozone will have an easy year, Valli replied: “No, not at all.”

Felix Hefner, UBS’s chief European economist, underscored this point when he said that if the recession ends in the second quarter, the recovery in 2023 will be “weak… as the stock-building game starts all over again.”

European leaders have managed to ensure natural gas storage is full for this winter, but new supplies will need to be bought next year if they are to stop relying on Russian hydrocarbons. An exercise that could be costly as global demand increases.

“It’s not exciting,” Hefner said of the outlook for the euro zone economy next year.

However, when viewed in the context of previous recessions, economists say the picture is not as bad as the 2008 global financial crisis or the recent pandemic. The euro area shrank by 4.4% in 2009 and by 6.1% in 2020.

“The main reason for this is fiscal policy, which provides some countervailing support,” Andriopoulos said.