European economy stagnating as consumers feel inflation pinch

The latest disappointing growth figure follows similarly sub-par growth estimates from the US yesterday which have stoked fears of a looming recession in the world’s largest economy.

The 20 countries that use the euro currency gained at least some momentum in the first quarter 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 gas supply to the continent over its war against Ukraine.

The mild weather also allowed an early start to construction activity. Furthermore, industrial activity has picked up this year, while China’s reopening after lifting its Covid-19 restrictions has helped to boost the outlook for the global economy.

However, inflation continues to dampen consumer spending, with any wage increases only partly offsetting how much more people now have to pay for groceries, clothing and other essentials.

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

Annual inflation in the eurozone fell to 6.9 per cent in March, down from February's 8.5 per cent, but is well above the ECB’s goal of 2 per cent considered best for the economy. The bank is likely to deliver another rate increase at its upcoming policy meeting.

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 suppress further economic growth.

While modest expansion is “putting the worries of a winter recession definitively to bed”, more persistent inflation will weigh on growth throughout the year, said economist Nicola Nobile at Oxford Economics.

“We expect the eurozone to plod along in the coming quarters in the absence of a strong growth driver, rather than jump-starting a strong expansion,” Nobile said.

The taut economic forces at play have triggered a rise in the number of people who are especially feeling the financial squeeze. According to figures released today (Friday) by the Insolvency Service, the number of people in the UK taking 'breathing space' from their financial problems has jumped by more than a third annually.

The Insolvency Service’s figures, covering England and Wales, show that there were 23,179 breathing space registrations in the first three months of 2023 – 34 per cent higher than in the first quarter of 2022. Within the total, 22,770 were standard breathing space registrations and 409 were mental health breathing space registrations.

Breathing space schemes give legal protections for people with problem debt. The scheme protects people from their creditors for 60 days, with most interest and penalty charges frozen and enforcement action halted.

As problem debt can be linked to mental health issues, these protections are also available for people in mental health crisis treatment, for the full duration of their treatment plus another 30 days.

Across last year, 70,546 registered breathing spaces were recorded, including 69,334 standard and 1,212 mental health breathing space registrations. People registering for breathing space may or may not end up entering a formal insolvency procedure.

The Insolvency Service also released company insolvency figures for England and Wales, showing that the number of firms going insolvent was 18 per cent higher than in the first quarter of 2022 but 4 per cent lower than the final three months of 2022.

There were 5,747 company insolvencies in total registered in the first quarter of 2023. The number of creditors’ voluntary liquidations (CVLs) remained close to the highest quarterly level on record, the Service said.

From the start of the pandemic until mid-2021, company insolvency levels had generally been low, when compared with pre-pandemic levels.

This is likely to have been driven in part by government fiscal and other measures that were put in place to support businesses and individuals during the pandemic, the report said.