Morgan Stanley: The recession for the Eurozone has already started – The dynamics of tourism is not enough

The recession for the European economy is already here according to the American investment house Morgan Stanley. The recession started as early as the third quarter of the year, at least in some economies. The US investment house sees all economies contracting from the fourth quarter of 2022, with Eurozone GDP falling for three quarters. In this context, analysts are downgrading their forecasts for the Eurozone economy and now expect a GDP decline of 0.5% in 2023.

Initially, it appeared that Eurozone GDP could remain in positive territory in the third quarter, helped by dynamics of tourism and related activities in the summer. But September’s PMIs (manufacturing indicators) show GDP contracted by 0.1% in the third quarter, with individual economies still showing some disparity: France and Spain continue to grow, while Germany and Italy are already shrinking.

Morgan Stanley estimates that inflation will remain strong in 2023, as energy is the main reason for rising prices, but now the appreciation is spreading to other sectors. According to the firm’s estimates, consumer prices peaked in September and are expected to close at an average of 8.2% in 2022 and 5.2% in 2023.

Despite fiscal support measures, the purchasing power of households it will decrease in 2022 and 2023 and corporate profits will come under severe pressure, analysts estimate. In this environment, the ECB is expected to raise interest rates by 75 basis points in October, 50 basis points in December and by 25 basis points in February and March, eventually bringing rates to 250 basis points.

Against this background, Morgan Stanley forecasts a contraction in Eurozone GDP of 0.1% in the third quarter of 2022, by 0.5% in the fourth quarter and by 0.4% in the first quarter of 2023. The recovery is expected to be more slower than usual as high inflation will continue to weigh on spending.

Thus, while the house expects a 0.5% reduction in Eurozone GDP in 2023, it emphasizes that in the bear scenario, i.e. if energy rationing is imposed, the GDP reduction will reach and 1.5%.

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