The economic output of the European Union (EU) registered a 0.3 percent quarterly growth in the first three months of 2023, according to preliminary data released on Friday by Eurostat, the
The increase in GDP, meager as it was, enabled the EU to narrowly avoid a technical recession which is defined as two consecutive quarters of negative GDP growth. The GDP of the EU registered a quarterly contraction of 0.1 percent in the fourth quarter of 2022.
Nonetheless, the nascent and slow recovery does not allow the bloc to lean back. Faced with a wide array of challenges, the EU's economy is still at bay and a sustained recovery hinges on its ability to steer out of the current predicament of balancing inflation with recession and tap external growth potentials, which, to a great extent, will derive from enhanced economic cooperation with China.
This photo taken on Feb. 24, 2023 shows the Euro sculpture in Frankfurt, Germany. (Xinhua/Shan Weiyi)
NO ROOM FOR COMPLACENCY
In the first quarter, seasonally adjusted GDP increased by 0.1 percent in the euro zone and by 0.3 percent in the EU from the previous quarter, according to Eurostat's data. Year on year, GDP in both zones grew by 1.3 percent.
Portugal recorded the highest quarterly increase of 1.6 percent, compared with 2.7 percent plunge in Ireland. Germany, the largest economy in the EU, was stable in the first quarter after shrinking 0.5 percent in the fourth quarter of 2022.
Although the EU economy looks more resilient than expected a few months ago, Carsten Brzeski, ING Germany's chief economist, believes "there is no reason for complacency."
In a note published on Friday, Brzeski identified the warmer winter weather, lower wholesale energy prices, China's optimization and adjustment of epidemic prevention measures, and lavish fiscal stimuli as some of the key factors behind the marginal economic increase in the EU.
Meanwhile, the divergence of growth in the 20-member euro zone is categorized by Brzeski as a source of concern, which "doesn't make the European Central Bank (ECB)'s task any easier."
With a mandate of upholding price stability in the euro zone, the ECB is faced with the daunting task of taming inflation without crippling the economy.
The inflation rate in the euro area and the EU came down to 6.9 percent and 8.3 percent respectively in March, from 8.5 percent and 9.9 percent in February.
Despite the decline, the inflation rate in the euro zone is still well above the ECB's target of around 2 percent in the medium term. "While declining, inflation remains very high," the International Monetary Fund (IMF) said in its latest regional economic outlook for Europe.
On top of the fight against sustained inflation, the EU will have to face the simultaneous task of sustaining economic growth and preserving financial stability at the same time.
Overall, "Europe's outlook is one of slow growth and sticky inflation," the IMF said.
According to the report, the risks for the EU are "severe and interconnected." For instance, if the EU fails to contain financial stability and bring down inflation fast enough, crisis and lower growth will ensue as a result.
In addition, tight labor markets, a resurgence of high energy prices, and fragmentation risk are also dampening the prospect of economic recovery of the EU.
GROWTH-INFLATION TRADEOFF
Partly due to persisting high inflation and monetary tightening by the ECB to rein in inflation, the economic recovery in the EU started to stumble since the middle of 2022.
To bring down inflation, the ECB has been tightening its monetary policies, mainly by hiking interest rates, which will inevitably push borrowing costs higher, slow down investment and thus weigh on the economic recovery.
"Monetary policy has been tightened by the sharpest pace in 40 years, which is resulting in a sharp deterioration of credit and monetary conditions," Milla Savova, a strategist with Bank of America, was quoted by Bloomberg as saying while commenting on the outlook of European equity markets.
"We expect this to lead to recessionary growth conditions over the coming months, which, in turn, would be consistent with a meaningful widening in risk premia," said Savova.
It is commonly believed that inflation and economic slowdown are on the opposite ends of the seesaw. Thus, the growth-inflation tradeoff will be a difficult problem for the ECB and the EU to tackle.
"Following the fastest tightening in decades, monetary policy is starting to bite, and financial sector risks have materialized," said the IMF report.
As high inflation lingers on in the EU, there has been growing pressure for higher wages in several European countries.
German's railway and transport union told the German press on Friday that it could launch longer strikes to paralyze the train network for weeks unless their demands for higher wages were met by the employer.
The ECB is nowhere near the end of its hiking spree. The EU's central bank is sticking to its hawkish stance, and rightly so.
According to the IMF report, the ECB's forceful act can prevent greater policy tightening and an economic downturn.
Real GDP growth in terms of purchasing power parity in the EU is expected to drop to 0.8 percent in 2023 and rebound to 1.7 percent in 2024, said the IMF.
CHINA INCREASINGLY NON-NEGLIGIBLE
As the EU strives to maintain the fragile economic growth, China's important role has become more and more non-negligible.
On the one hand, China's adjustment of its COVID-19 measures has prompted a rebound in external demand, which has contributed to the economic recovery in the EU. On the other, there is great potential in broadening China-Europe economic cooperation.
German chemical giant BASF Group on Thursday reaffirmed its intention to intensify efforts to boost business activities in China.
Plagued by soaring energy prices and shrinking profits in Europe, the chemical giant sees good opportunities in China. With its revenue and profit shrinking, the company is investing 10 billion euros (11.1 billion U.S. dollars) to set up a Verbund site in southern China's Guangdong Province by 2030.
China's economy rebounded faster than expected, up by 4.5 percent year on year in the first quarter.
Joerg Wuttke, president of the EU Chamber of Commerce in China, suggested that European companies should become more involved in China. "We establish research and development centers in China. The country is a kind of fitness center for companies. And that's why every move away (from China) is basically really problematic for us," Wuttke said.
Michael Schumann, chairman of Germany's Federal Association for Economic Development and Foreign Trade, is convinced that the Chinese market is still of interest to German companies and means further opportunities for them despite the supply chain challenges brought by the COVID-19 pandemic, and that Germany should maintain close ties with China.
Airbus CEO Guillaume Faury told Xinhua in a recent interview that he has always been impressed by the energy, speed, optimism and ability to go fast in China.
Faury sees great potential in the aviation market in China, which represents around 20 percent of the world's commercial aviation market.
"Our own forecast predicts that over the next 20 years, air traffic in China will grow by about 5.3 percent every year, significantly faster than the estimated world average of 3.6 percent," he said.
European Commission President Ursula von der Leyen has also been optimistic about the future of bilateral economic cooperation.
"We have many strong links and China is a vital trading partner -- our trade represents some 2.3 billion euros a day. Most of our trade in goods and services remains mutually beneficial," she told the European Parliament's plenary session on April 18.
