Towards a “great economic stagnation”?

Eurozone GDP figures have been revised downwards. Indeed, in the first quarter of 2023, GDP fell by 0.1% in the euro zone quarter on quarter. Growth in the last quarter of 2022 was also negative (−0.1%). Consequently, the euro zone has indeed entered into “recession”. At the same time, the unemployment rate is historically low, at 6.5% in May 2023. While some economists speak of a “stagnation”, inflation in the euro zone remains persistent. Thus, the economic context is not showing encouraging signs.

There “recession” announced in the euro zone…

Eurostat has revised these estimates downwards for the first quarter of 2023. Indeed, GDP would not increase by 0.1% over the first quarter of 2023, but on the contrary, it would decrease by 0.1%… This figure is driven by the recession in Germany (−0.3%) and in other central and eastern European countries. Ireland, Lithuania, the Netherlands, Estonia, Malta, Hungary, Germany and Greece are among the worst performers. On the other hand, Poland, Luxembourg and Portugal are driving growth upwards with more than 1% growth. France, for its part, is close to stagnation. The highlight of this “recession” is the exclusion of Germany as the leader of the eurozone economy.

Consumption falters but investment resists

In detail, household consumption fell, as did public spending. On the other hand, the rise in the interest rate (delayed in the euro zone) does not seem to have had an impact on investment. Investment was up by 0.6% in the first quarter of 2023. Finally, imports fell more sharply than exports. Nevertheless, the decline in consumption was even more marked in the last quarter of 2022.

Growth remains strong in the United States!

Moreover, this trend in the euro zone remains opposite to that observed in the United States. At the same time, US GDP is effectively maintaining its course. Moreover, the United States has already briefly gone into “recession” (and although the authorities did not retain such a qualification). Nominal GDP contracted by 0.9%, then by 1.6%, in the first and second quarters of 2022. Real GDP (adjusted for inflation) fell by −0.41% then −0.14% over the same period. There was therefore a situation of contraction. But since then, US growth has held up, while the reduction in inflation is indeed effective.

In addition, US growth stood at +0.8%, then +0.63%, and +0.3% between the third quarter of 2022 and the last quarter of 2023. It is therefore a growth economy still strong in the United States. Indeed, the average (real) quarterly growth over the last 10 years was 0.5%. Under these conditions, it is understandable that the United States is widening the gap with the euro zone.

A recession every 6 years in the United States?

Moreover, we must bear in mind that the average duration between two recessions is 6.6 years in the United States. This figure relates to the evolution of GDP since 1950. Moreover, the figure of 6.6 years corresponds exactly to two kitchin cycles in economy. It happens that recessions are spaced out by 3 or 4 years, or even sometimes by 8 or 10 years. Additionally, the period from 2009 to 2020 was the longest recession-free period in U.S. history since 1950. This prosperous period, characteristic of the ascending phases of the Kondratiev cycle, is often followed by a phase of inflation that we observe today. But periods of inflation often mark the occurrence of more frequent (and relatively less intense) recessions.

There is a false debate among economists today. Indeed, some argue that the economic cycle is more “flattened” and therefore less ample and virulent. However, this is indeed the consequence of the fact that we are probably in a period of more frequent recessions, and mechanically less intense. Conversely, economic depressions often occur more than two decades after periods of inflation. As a result, a recession in 2023 seems globally less likely given that the previous one was in 2020. But if we take into account the fact that we are in a period of inflation, the durations between recessions may be shorter. . We can therefore attend this “great stagnation” in the sense that economic growth is more unstable. That is, recessions can be more frequent and less intense.

The risk of structural inflation in the euro zone?

One of the explanatory elements to the ” reprise “ in the United States is the reduction of inflation. Inflation has gone from almost +9% in June 2022 to +4.12% today. Which is still a very high standard. For its part, core inflation, ie inflation excluding commodities and energy, stood at +5.3%. It is therefore understandable that inflation in the United States is mainly maintained by the economy itself, independently of energy or raw materials.

But the situation is sufficiently different in the euro zone. Core inflation is not yet falling sharply and the lag with the United States is becoming large enough to appear abnormal. Inflation in the euro zone remains high and stands at nearly 7%. For its part, core inflation remains strong at 5.6%. From the American perspective, inflation should come down. But the extent of inflation in the euro zone is more virulent and could be significantly longer lasting.

Consequently, the persistence of inflation in the euro zone has a more degrading effect on activity, and in particular consumption. On the other hand, inflation stimulates the market power of companies, which both reduces unemployment and encourages investment. Nevertheless, if wages begin to follow the rise in prices, then inflation should be more durable, and the outlook for companies more degraded.

A still hesitant effect on the markets

The CAC 40, as well as the DAX 40, do not seem particularly disturbed by the announcement of a recession in the euro zone. The CAC 40 lost 1.75% over one month, while the DAX gained nearly 2%. This performance is all the more intriguing as the recession is mainly driven by the weaker economic situation in Germany. Indeed, the two indices are close to their historical peak.

In addition, the highlight of recent weeks is the record low volatility. The latter fell back below 15 for the S&P 500 VIX. This level had not been reached since 2020! This means that the agents do not anticipate any particular movement of the indices, and they are particularly confident and convergent in their anticipation. This low volatility does not benefit all indices. For their part, gold and bitcoin seem to be penalized by low volatility. Gold fell 3.7% on a month, when bitcoin is down 3.4%.

In conclusion

Ultimately, the euro zone is (finally) entering recession! This recession remains minimal (−0.1% in the first quarter of 2023), but sufficient to be qualified as such. It is driven by countries like Germany and is explained by the weakness of consumption. On the other hand, the extent of the recession is reduced by the improvement in the external trade situation as well as in domestic investment. The presence of low unemployment makes it impossible to speak of a recession ” hard “.

This recession is not unlike that of the United States observed in recent months. An acceleration of growth was observed as a result. The United States effectively combined lower inflation with sustained growth. This is not without reminding that periods of inflation often involve more frequent recessions. But the euro zone has some fundamental differences with the United States. Although the two economies may react symmetrically, the latest inflation and growth figures raise questions.

Structural inflation remains high in the euro zone and many countries are experiencing real economic stagnation. In this context, one can speak of “stagnation” typical of long-term economic statistics. The risk is obviously that of getting bogged down in a crisis of “stagflation”. Finally, the stock market indices do not seem to be impacted. The decline in volatility, however, penalizes gold and bitcoin in the short term.