The Eurozone has slipped into a mild recession, with two successive quarters of economic contraction marking the turn of the year, according to recently revised official data.
The downturn has been primarily driven by high inflation discouraging consumer spending and governments tightening their budgets.
The economic output in the Eurozone witnessed a dip of 0.1% in the first quarter of 2023 compared to the previous quarter. The output for the fourth quarter of 2022 also showed a similar dip, confirming the recession, which is typically characterized by two consecutive quarters of economic contraction.
Despite the recession within the Eurozone, the broader European economy has managed to dodge the downturn, with the EU’s Gross Domestic Product (GDP) ticking up 0.1% in the first quarter of 2023.
Meanwhile, the US economy outperformed both the eurozone and the EU, with GDP increasing by 0.3% in Q1 2023.
This recession presents a challenge for the European Central Bank (ECB) as it meets next week to set interest rates. With inflation remaining more than three times the bank’s target, raising rates further to combat it could harm the economy.
Frederik Ducrozet, Head of Macroeconomic Research at Pictet Wealth Management, noted on Twitter that the situation could have been worse given the magnitude of the “shock” to incomes once adjusted for inflation.
🇪🇺 Contributions to euro area GDP: domestic demand has been weak (although it could have been worse given the magnitude of the shock to real income) and inventories weighed on Q1 growth as well. Net trade contributed positively partly due to weak imports. pic.twitter.com/BpJBBHgyiu
— Frederik Ducrozet (@fwred) June 8, 2023
Andrew Kenningham, Chief Europe Economist at Capital Economics, attributed this recession to household consumption being “hit hard” by high prices and rising interest rates.
Amid this economic turbulence, the cryptocurrency market has shown mixed reactions. Investors, concerned about the stability of the banking industry, have turned to cryptocurrency, bolstering the non-sovereign money thesis.
“Against this distressing backdrop, the non-sovereign money thesis grows stronger and appeals more widely than it ever has before”,stated Ian Wittkopp, COO of SinoGlobal Capital.
However, the current macroeconomic climate also presents challenges for the crypto market. Alkesh Shah, an analyst at Bank of America, suggested that there might be limited near-term upside for crypto prices heading into June due to low conviction, limited catalysts, and a challenging macro backdrop likely capping digital asset upside.
With the Eurozone’s economic health in flux, the crypto market finds itself in a precarious position, serving as both a refuge for investors and a vessel vulnerable to the prevailing economic winds.
As the European Central Bank prepares to set interest rates next week, the interaction between traditional financial markets and the crypto landscape will continue to evolve, adding another layer of complexity to this intriguing narrative.
