(Bloomberg) -- The euro area is on course to avoid a recession after unexpectedly growing at the end of 2022, despite double-digit inflation and Russia’s invasion of Ukraine.

Gross domestic product edged up by 0.1% in the final quarter, Eurostat said Tuesday, defying economist estimates for a contraction of 0.1%. While German and Italian output shrank, France and Spain recorded expansion. There was also stronger-than-anticipated data on Monday from Ireland. 

The euro region, which expanded to 20 countries when Croatia joined on Jan. 1, has struggled with record spike in prices sparked by the war-induced surge in energy costs. Governments have sought to offset the damage for households and firms, however, dispensing billions of euros in aid. A mild winter has also helped to calm energy markets.

The growth highlights the euro zone’s resilience after overcoming risks of fuel shortages. But with economists also predicting output will dip in the first quarter, the bloc isn’t out of the woods yet.

Among several headwinds are rising borrowing costs, which haven’t fully filtered through, while consumers in some countries will still see costlier energy bills.

Inflation, however, is projected to ease significantly, possibly sooner than previously thought thanks to a decline in natural gas prices. The labor market has also held up well so far.

What Bloomberg Economics Says...

“An ongoing squeeze on household spending power means the euro-area economy could yet shrink in 1Q. With energy costs plunging, the big picture is that any winter downturn is likely to be shallow. The economy holding up better than feared means the ECB can stay focused on tackling high and persistent inflation.”

—Jamie Rush, chief European economist

The better-than-anticipated performance will likely cement the European Central Bank’s path of interest-rate increases. Officials deem inflation a bigger threat to the continent than what they see as a mild economic slowdown. They’re also looking past the retreat in headline price gains to focus on sticky underlying inflation.

Key Developments

  • German Recession Risk Increases After Surprise Contraction
  • IMF Raises World Economic Outlook for the First Time in a Year
  • ECB Debate Looks to March With Half-Point Hike Assured This Week

Italy GDP (11 a.m.)

Italy’s economy shrank 0.1% in the fourth quarter, according to national statistics institute Istat.

The longer-term outlook is rosier: The Bank of Italy this month lifted its economic-growth prediction for 2023 to 0.6% from 0.4%.

Maintaining even a small expansion is crucial for Prime Minister Giorgia Meloni’s right-wing government, which needs fiscal leeway to continue to extend support for families and businesses hurt by rising energy and food costs.

Portugal GDP (10:30 a.m.)

Portuguese output grew 0.2% from the previous quarter between October and December, down from the 0.4% expansion notched in the final three months of 2022. The outcome matched the median estimate in a Bloomberg survey of economists.

The country’s outlook has dimmed. The central bank in December cut its 2023 growth forecast to 1.5%, warning of softer private consumption and exports.

Bloomberg Economics on the Euro Zone (10:10 a.m.)

“Another strong performance from the Irish economy may have done just enough to prevent the euro area from contracting in 4Q — it’s a close call,” said Jamie Rush, chief European economist at Bloomberg Economics. “The big picture is that any winter downturn is now likely to be shallow.”

ECB bank lending survey (10 a.m.)

Businesses in the euro zone saw banks tighten credit standards by the most since the sovereign-debt crisis more than a decade ago, according to the European Central Bank.

Uncertainty over the economic outlook and firms’ situations, declining risk tolerance and higher funding costs contributed to decisions by financial institutions to substantially toughen standards in the final three months of last year, the ECB’s quarterly Bank Lending Survey showed.

Credit standards also tightened strongly for mortgages and other loans to households.

Germany unemployment (9:55 a.m.)

German unemployment dropped by 22,000 in January, defying the median estimate in a Bloomberg survey for an increase of 5,000. The jobless rate held at 5.5%.

Commenting on the numbers, Federal Labor Agency chief Andrea Nahles said the jobs market remained resilient at the beginning of the year, even as geopolitical and economic uncertainties had some impact.

Bloomberg Economics on French inflation (9:10 a.m.)

Senior economist Maeva Cousin:

“French inflation rebounded in January, reflecting increases in gas bills and road fuel costs. We expect another, electricity-driven, move higher in February. The price gains will likely contribute to tipping the economy into a contraction in the first quarter — after data earlier today showed GDP expanded slightly in the last three months of 2022.”

  • For full REACT, click here

France inflation (8:45 a.m.)

French inflation accelerated in January as the government wound back some measures to contain energy costs and food prices jumped.

The standardized European measure of prices rose 7% from a year ago after a 6.7% increase in December. That matches economists expectations. 

France recorded one of the euro area’s lowest inflation rates last year after the government moved sooner than others to limit energy-price increases. That means year-on-year measures are now likely to slow more gradually than in other countries.

French statistics agency Insee last forecast that the national measure of inflation would only start to ease from March.

Austria GDP (8:15 a.m.)

Austria’s economy contracted in the fourth quarter, led by declines in construction and services, according to the Wifo research institute. Gross domestic product fell 0.7% from the prior three months, with a drop in private consumption outweighing boosts to investments and exports.

Wifo reckons Austria can eke out growth of 0.3% in 2023 after expanding 4.7% last year, with consumption slated to recover in the second half.

Bloomberg Economics on French GDP (8:10 a.m.)

Senior economist Maeva Cousin:

“French GDP expanded only marginally in the final three months of 2022, with the economy held back by high energy costs, strikes in the refinery sector and tightening financing conditions. The positive outcome for the fourth quarter means a technical recession may be averted, but we still expect the economy to contract in 1Q23.”

  • For full REACT, click here

Lithuania GDP (8 a.m.)

Lithuania posted its first quarterly decline in output in two years as soaring prices and rising interest rates bit into household spending. GDP shrank by 1.7% from the previous period.

Though inflation is slowly coming down, consumer spending is now being hit by costlier loans. Retail sales plunged 6.2% from a year ago in December — the biggest drop in almost three years.

Even so, the central bank lifted its economic-growth forecast for 2023 to 1.3% at the end of last year.

French Minister Speaks (7:45 a.m.)

Finance Minister Bruno Le Maire said France held up well in the face of the energy crisis, reiterating that the government expects growth in 2023.

“The fundamentals of our economy are solid — our businesses continue to invest and create jobs,” he said in a text message. “The resilience of our entrepreneurs and workers is exceptional.”

Le Maire spoke as French labor unions lead a second day of mass strikes and protests against raising the retirement age. Politicians — including the finance chief — have been keen to highlight that past episodes of labor protests typically have a “negligible” effect on annual output.

France GDP (7:30 a.m.)

Gross domestic product rose 0.1% in the fourth quarter, supported by investment and net trade, the Insee statistics agency said Tuesday. Economists surveyed by Bloomberg had estimated GDP to remain unchanged.

Despite the positive surprise, there were signs of weakness as domestic demand softened due to cutbacks by households. In December alone, consumer spending fell 1.3% from November, while analysts surveyed by Bloomberg had forecast a 0.3% increase. 

And there are still headwinds. Insee forecasts GDP growth of only 0.1% this quarter and doesn’t see inflation easing until March. While business confidence is above long term averages, consumers are increasingly despondent about the economic situation, surveys show. 

Nevertheless, the performance will help President Emmanuel Macron, who’s trying to pare back the vast amounts his government has handed out to consumers and businesses as energy costs spiked.

--With assistance from Alessandra Migliaccio, Milda Seputyte, Marton Eder, Jana Randow, Joao Lima, Barbara Sladkowska, Kristian Siedenburg, Joel Rinneby, Ainhoa Goyeneche and Giovanni Salzano.

(Updates with Bloomberg Economics after sixth paragraph.)

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