Germany is starting 2023 with brighter prospects than could not have been expected a few months ago. The unusually warm weather has invalidated concerns that there would be disruptive gas shortages and rationing over the winter. Natural gas prices have been falling steadily since August 2022 from a peak of $9.98 to a low of $2.98 on Wednesday, and LNG supplies from the U.S. and the Middle East kept flowing.
In recent statements by the European Central Bank (ECB), President Christine Lagarde reaffirmed that the bank will maintain its aggressive interest rate hikes. Lagarde argued that inflation in the Eurozone remain elevated, despite optimism that inflation may have peaked as latest data from last week showed that inflation in Europe dropped slightly to 9.2% in December 2022.
ECB governing council member Klaas Knot stated that the ECB is likely to raise interest rates by 50 basis points in February and March and will continue to increase rates in the following months. These comments came before the ECB enters a blackout period on Thursday, ahead of the central’s bank policy meeting on the 2nd of February.
The consumer confidence indicator in the Euro Area rose for a third month to -22.2 in December, up from -23.9 the prior month reaching the highest levels since May 2022. A key gauge of the Eurozone economy signalled growth for the first time in seven months, as the collapse of natural gas prices underpinned consumer sentiment and averted a meltdown in industrial output.
S&P Global flash composite purchasing managers’ Index, which tracks both the manufacturing and services sectors that together account for more than two-thirds of Germany’s economy, rose for the third consecutive month, to 49.7 in January from 49.0 in December.
S&P Global composite purchasing managers’ index for the Eurozone rose by more than expected to 50.2 in January, from 49.3 in December. While that may not be sufficient to avert a recession, it adds to growing evidence that a potentially upcoming recession could be brief and shallow, and as such allowing the European Central Bank to keep raising interest rates to bring inflation down faster.
While the euro zone composite PMI returned to growth territory in January, Germany remained below 50. January marked the seventh consecutive month in which the indicator lagged below the 50 level, which separates growth from contraction.
Germany’s most prominent indicator, the Ifo business climate indicator rose by 1.6 points from a month earlier to 90.2 in January 2023, the fourth consecutive month of increase and the highest level since June last year.
The inflow of optimistic data continues. After the PMI and the ZEW, it is now the latest Ifo index reading which points to an improving outlook for the German economy. While the economy is not out of the woods yet, it shows its more resilient than feared.
The steadying of the eurozone grows hopes that the block might escape a recession. Fears over the energy market have been alleviated by falling oil and gas prices, also helped by the warmer than usual weather and generous government assistance.
Overall, the European economy has emerged from the Russia-Ukraine war at a better shape than anticipated. For the most part of 2022, the consensus was that the region would struggle because of the energy sector. Instead, data published recently showed that the economy avoided a recession in the third quarter, as it was supported by the services sector.
