Eurozone will avoid recession.

 The euro­zone will avoid a reces­sion this year, accord­ing to a widely watched sur­vey of eco­nom­ists that illus­trates the sharp about-turn in global eco­nomic sen­ti­ment in the past couple of weeks. As recently as last month, ana­lysts sur­veyed by Con­sensus Eco­nom­ics were pre­dict­ing that the bloc would plunge into reces­sion in 2023. But this month’s sur­vey found that they now expect it to log growth of 0.1 per cent throughout 2023. This is because of lower energy prices, bumper gov­ern­ment sup­port and the earlier than anti­cip­ated reopen­ing of the Chinese eco­nomy, which is set to boost global demand.

The upgrade comes after offi­cials and busi­ness lead­ers at last week’s annual World Eco­nomic Forum

in Davos also embraced a more upbeat out­look, and the IMF sig­nalled that it would soon upgrade its fore­casts for global growth. Eco­nom­ists had feared that Europe would be among the hard­est-hit areas of the worldwide eco­nomy this year because of its expos­ure to Rus­sia’s war with Ukraine. Just weeks ago, IMF man­aging dir­ector Kristalina Geor­gieva said that «half of the European Union will be in a reces­sion» dur­ing 2023. Carsten Brzeski, head of macro research at ING Bank, described the about-turn in eco­nom­ists’ fore­casts as «a reces­sion that never came».

«Our per­cep­tions have changed quite rad­ic­ally since Octo­ber,» said Andrew Ken­ning­ham, chief Europe eco­nom­ist at Cap­ital Eco­nom­ics, adding that gov­ern­ment sup­port had been more gen­er­ous than expec­ted, while the motor industry has reboun­ded more strongly than pre­dicted. Anna Tit­ar­eva, an eco­nom­ist at UBS, said that the eas­ing of sup­ply-chain dis­rup­tions, a strong labour mar­ket and excess sav­ings explained the euro­zone’s eco­nomic resi­li­ence. However, some eco­nom­ists do still expect a reces­sion. «It looks like we may get, at worst, a mild reces­sion, but that will be fol­lowed by a weak recov­ery».

Rising infla­tion has been a game-changer for cent­ral banks. A few years ago, when infla­tion was stub­bornly low des­pite a series of interest rate cuts, cent­ral banks expan­ded their toolkit to lift infla­tion. With infla­tion accel­er­at­ing to his­toric highs in 2022 and policy rates rising, it is time to reverse this extraordin­ary meas­ure. Col­lat­eral scarcity in the mar­ket for Ger­man gov­ern­ment bonds is a sig­ni­fic­ant dis­tor­tion.

The crowding out of tra­di­tional investor groups, for example, in the mar­ket for asset-backed secur­it­ies, rep­res­ents another side effect. Finally, a prom­in­ent and last­ing role of cent­ral banks in cor­por­ate and covered bond mar­kets can impair mar­ket liquid­ity and ali­en­ate issuers from their tra­di­tional investor base.

Cent­ral banks should only inter­vene to the degree neces­sary for mon­et­ary policy pur­poses chase pro­gramme star­ted. Excess­ive infla­tion calls for a determ­ined response, which we are pur­su­ing in the Eurosys­tem. The critical policy rates are our primary instru­ment to steer mon­et­ary policy on that course. The time has come for the Eurosys­tem to scale back its mar­ket pres­ence.

The Eurosys­tem will start redu­cing its mar­ket foot­print by decreas­ing its APP port­fo­lio hold­ings by an aver­age of € 15bn a month between March and June. From a mar­ket func­tion­ing per­spect­ive, there are good reas­ons for such a meas­ured approach. Second, the ease of absorp­tion of higher bond volumes will prob­ably stay closely linked to the out­look for infla­tion and the expec­ted interest rate path. Last, an over-pro­por­tional share of this year’s elev­ated bond issu­ance in the euro area is likely to hit the mar­ket in the first half of the year.

This is a chal­lenge for cent­ral banks and mar­ket par­ti­cipants. All in all, I am optim­istic that a pre­dict­able and clear with­drawal of the Eurosys­tem from its APP hold­ings will sup­port our fight against infla­tion without trig­ger­ing mar­ket tur­bu­lence. The Eurosys­tem will reas­sess the speed and scope of its actions in early sum­mer and, in doing so, could well con­sider a more ambi­tious future path.

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