Euro Zone Falls into Recession as Growth Revisions Impact Germany and Ireland

The German economy has officially entered a recession in the first quarter, signaling troubling times ahead for the euro zone.

Official revised estimates from Eurostat, the region’s statistics office, reveal that the euro zone reported a gross domestic product (GDP) decline of 0.1% in Q1. This downward revision came after Germany and Ireland also cut their growth figures, with Ireland experiencing a contraction of nearly 5%. The weak performance in Q1, along with a 0.1% contraction in Q4 of the previous year, has pushed the euro zone into a technical recession.

Andrew Kenningham, chief Europe economist at Capital Economics, noted that this contraction confirms the euro zone’s entry into a technical recession and predicts further contraction throughout the year. Claus Vistesen of Pantheon Macroeconomics also expects limited growth in the coming months, particularly in investment.

These economic challenges pose a dilemma for the European Central Bank (ECB), which has been on a hawkish path for the past year. The ECB has recently set its main rate at 3.25% and is expected to announce another 25 basis point hike in its upcoming meeting. However, a weak economic performance could hinder the ECB’s ability to further raise rates in its efforts to combat inflation.

Despite this, ECB officials have emphasized the importance of reducing prices over avoiding an economic slowdown. Market players have responded to the data by anticipating further monetary tightening, resulting in higher euro zone bond yields.