Contrary to the previously published figures, the European economy faltered this winter. Economic activity was unstable in the fourth quarter of 2022 compared to the previous three months but fell by 0.1%. And in the first quarter of this year, it did not increase by 0.1% as announced in the 1st estimate, but economic activity fell again by 0.1%. With GDP declining for two consecutive quarters, the eurozone is officially in an economic recession.
This underperformance is explained by the decline in household consumption in the last six months and the sharp fall in public spending at the beginning of the year. Geographically, Germany, where GDP fell by 0.5% and 0.3% in the last two quarters, is the primary driver of the recession in the euro area.
The fact that GDP is finally slightly lower, rather than marginally higher, does not change the economic situation of the euro area. It was assumed that economic activity had been poor this winter. The question now is what will happen in the coming months. The volume of retail sales remained stable in April. With a sharp rise to offset the surge in energy prices in 2022, public spending will continue to moderate this year. Consequently, we should not expect a strong rebound in economic activity in the coming quarters. Eurozone GDP growth will be feeble this year, probably even zero.
However, this should not incentivise the European Central Bank to review its policy rate hike programme. Despite the recession, inflation remains too high. Employment is also still on the rise, and labour shortages are intensifying. This promotes wage increases and maintains inflationary pressures.
We maintain our 10% investment in bonds in euro on our 10-year balanced portfolio.