Europe’s economy risks a recession after output falls in the third quarter

The euro area economy is at risk of entering a recession later this year, as official data shows a slight contraction in output during the third quarter. Gross domestic product (GDP) across the 20 eurozone countries fell 0.1% compared to the previous quarter. This decline follows a small increase of 0.2% in the second quarter and highlights the fragile balance between contraction and growth in the eurozone. Experts suggest that even if the eurozone avoids a technical recession, the economy will remain sluggish. Inflation, on the other hand, has continued to ease, with consumer prices rising 2.9% in October compared to a year ago. Core inflation, which excludes volatile food and energy prices, also decreased. The European Central Bank (ECB) will likely welcome this decline in inflation as it has been raising interest rates to combat high prices. The eurozone economy has struggled to recover momentum since the impact of Russia's invasion of Ukraine and subsequent energy price increases. Interest rate hikes intended to control inflation have further dampened consumer and business spending. Recent survey data indicates a downward trend in the manufacturing and services sectors, with demand expected to weaken further. Even if the region avoids a recession, economists believe a meaningful recovery is still far off. Official GDP data from Germany, France, and other countries in the eurozone support this view, with modest growth or slight contraction reported. Overall, the economic environment is weakening, but a sharp recession is not anticipated. However, ongoing economic and geopolitical uncertainty, coupled with the impact of higher interest rates, will continue to weigh on economic activity in the coming quarters.