Tax-haven Ireland helps eurozone dodge recession bullet​

The eurozone eked out growth in 2022’s fourth quarter, avoiding recession even as sky-high energy costs, waning confidence and rising interest rates took a toll on the economy that is likely to continue this year.

GDP across the currency bloc expanded by a tiny 0.1% in the fourth quarter, data from Eurostat showed on Tuesday, outperforming expectations in a Reuters poll for a 0.1% drop.

Compared with a year earlier, growth was 1.9%, just beating expectations of 1.8%.

The eurozone spans 350-million people in 20 countries. Among the biggest economies, Germany and Italy recorded negative growth rates for the quarter but France and Spain expanded, Eurostat added, based on a flash estimate that is subject to revisions.

Russia’s nearly year-old war in Ukraine has proved costly for the eurozone given some members’ heavy reliance on cheap energy.

Surging oil and gas prices have depleted savings and held back investment, while forcing the European Central Bank (ECB) into unprecedented rate hikes to arrest inflation.

But the economy displayed some unexpected resilience, much like during the Covid-19 pandemic when growth outperformed expectations as businesses adjusted faster to changed circumstances than policymakers had predicted.

More recent figures, such as a crucial confidence indicator, suggest growth may have hit bottom already and a slow recovery is under way, helped by generous government support and a mild winter, which has limited energy spending.

The overall picture nevertheless remains weak, with meagre growth forecast for 2023 due to a large drop in real incomes and surging interest rates.

“The headline GDP figure gives a misleadingly favourable impression of economic conditions in late 2022,” said Ken Wattret, an analyst at S&P Global Market Intelligence.

“The key takeaway from member states’ data is the breadth of weakness in private consumption, with the acute squeeze on household real incomes due to soaring inflation belatedly biting.”

Ireland’s 3.5% quarter four growth figure distorted the overall picture as it was driven largely by activity among big foreign companies based there for tax reasons, economists said, adding that without Ireland, eurozone growth would have been zero.

The ECB has raised rates by a combined 2.5 percentage points to 2% since July to tame inflation, and markets see another 1.5 percentage points of increases by midyear.

Such a rapid increase is putting a brake on bank lending, and last quarter access to loans suffered the biggest drop since the bloc’s 2011 debt crisis.

“In the coming months, the noticeable tightening of monetary policy will increasingly slow down the economy,” Commerzbank economist Christoph Weil said.

“We continue to expect the euro area economy to contract slightly in the first half of the year, and the recovery expected in the second half is likely to be weak.”

Reuters