Europe's economy barely grows as inflation pinches consumers

The European economy scraped out meager growth in the first three months of the year, barely gaining momentum as stubborn inflation raises the price of groceries and erodes people's willingness to spend paychecks that are failing to keep pace.

Friday's less-than-stellar increase of 0.1 per cent from the previous quarter follows disappointing growth estimates from the US, which kept alive fears of a looming recession in the world's largest economy.

The 20 countries that use the euro currency picked up a little speed from January through March after zero growth in the last three months of 2022. The eurozone avoided a winter recession thanks to mild weather that alleviated pressure on natural gas supplies.

European governments and utilities also scrambled to line up additional sources to heat homes, generate electricity and power factories after Russia cut off most of its supply to the continent over its war against Ukraine.

Germany, Europe's largest economy, turned in disappointing zero growth from the previous quarter. After a contraction of 0.5 per cent at the end of 2022, the country is in the “recession danger zone”, said Carsten Brzeski, chief of global macro at ING bank. Ireland shrunk 2.7 per cent.

Spain and Italy performed better, both growing 0.5 per cent, while France managed a 0.2 per cent expansion thanks to exports.

The standout was Portugal, which needed a bailout during the eurozone debt crisis a decade ago, shining with 1.6 per cent.

European industrial activity has picked up, and China's reopening from COVID-19 restrictions has boosted the outlook for global economy. But the US disappointed, growing at an annualised rate of 1.1 per cent, or 0.3 per cent compared with the quarter before. In Europe, the mild weather also allowed an early start to construction activity.

Inflation, however, is holding back consumer spending, with wage increases only partly offsetting how much more people have to pay for groceries, clothing and more. Higher food prices have taken over from energy as a key driver of inflation, running at a painful 15.5 per cent in March as energy costs dropped 0.9 per cent from a year ago.

Interest rate increases by the European Central Bank aimed at getting inflation under control also will weigh on growth by making credit more costly for purchases or business investment.

“Easing supply bottlenecks, lower energy prices and signs of global economic resilience offset weakness in private consumption, with real household incomes still struggling under the weight of high inflation,” wrote Rory Fennessy, European economist at Oxford Economics.

“We don't expect growth to pick up meaningfully over the course of 2023,” he added.

Annual inflation in the eurozone eased to 6.9 per cent in March from 8.5 per cent the month before but is well above the ECB's goal of 2 per cent considered best for the economy. So-called core inflation, which excludes volatile food and energy prices, also hit a record 5.7 per cent.

With fears that inflation is becoming entrenched in the economy longer term, the bank is likely to deliver another rate increase at its policy meeting on Thursday.

Credit may get even tighter after the failure of Silicon Valley Bank in the US and the forced takeover of Credit Suisse by rival Swiss bank UBS. The turmoil could increase market and regulatory scrutiny of bank finances and make them less likely to risk lending. That could help ease inflation but also weigh on economic growth.