4 minute read 07 December 2022

Eurozone economic outlook, December 2022

With no clear end in sight to high inflation and global uncertainty, the Eurozone is likely to step into a period of stagflation, even if a recession might be avoided

Dr. Alexander Boersch

Dr. Alexander Boersch


Despite considerable headwinds, the Eurozone economy had a better-than-expected third quarter. Nevertheless, the coming winter will likely prove extremely challenging, mainly due to sky-high inflation rates, tightening of monetary policy, continuing high uncertainty, and the looming energy crisis. Private consumption in particular is under pressure and will prove to be a drag on growth going forward as consumers suffer from a loss of real income due to inflation.

Economic situation: Some good news

The Eurozone economy continued to grow at 0.2% in the third quarter of 2022, after 0.7% in the first and 0.8% in the second quarter.1 This growth was largely driven by domestic demand following an unexpectedly good tourism season, especially in Italy, France, and Spain; earlier many analysts had expected a stagnation.2

There are also positive developments regarding the energy crisis. Gas demand in Europe is 7% lower than the average between 2019 and 2021.3 While there is still a way to go before the goal of a 15% reduction in demand until March is met, there have been some positive developments. Some countries were able to reduce gas demand substantially—Finland, for example, by more than 50%, and the Netherlands by almost 20%.4 At the same time, and partly due to an unusually warm October, gas-storage levels reached 95% in early November. This and the energy savings suggest that Europe looks increasingly likely to avoid outright shortages and therefore gas rationing, a key risk that could cause a deep recession.

The labor market is another bright spot. Unemployment in the Eurozone decreased slightly to a record low of 6.6%, suggesting that uncertainties and recession fears left the labor market unaffected. In fact, labor shortages continue to be a challenge for companies. According to the Deloitte European CFO Survey,5 skilled labor shortage is among the top three risks for companies in Germany, Netherlands, and Austria. This indicates that the labor market, despite economic headwinds, is still thriving, and thus stabilizing the economy.

Inflation: Still soaring

Inflation meanwhile shows no signs of abating. On the contrary, the official flash estimate for October sees inflation in the Eurozone at another record high of 10.7%, after reaching 9.9% in September. This surge was once again driven by not only accelerating energy prices, which increased by 42%, but also food prices, which were up 13%.6

Notably, inflation varies considerably across countries in the Eurozone. The hardest hit countries include the Baltic states, which suffer from inflation rates of up to 22%, and the Netherlands at 17%. At the other end of the spectrum, France and Spain posted a comparably moderate inflation rate of 7%. The two other big Eurozone economies, Italy and Germany, are hovering in the middle with inflation rates close to 13% and 12%, respectively.7

The European Central Bank (ECB) reacted in October with a second jumbo hike of 75 basis points. With the deposit rate now at 1.5%, the ECB made it clear that this is not the end of the tightening cycle, even in the context of increasing recession risks in the Eurozone economy. A further hike in December is to be expected and the tightening cycle is very likely to continue in 2023, at least into the first quarter.

Economic sentiment

The confluence of risks—from the energy crisis to the war in the Ukraine and high inflation—has taken its toll on business and consumer sentiment, which continue to fall.

The Deloitte European CFO survey shows that the financial prospects of corporates have turned very negative. The index value for business prospects fell by another 17 percentage points compared to the spring survey and stands at –51. Expectations for operating margins over the next 12 months are also negative, as are investment intentions, whereas employment intentions and revenue expectation remain in the positive territory.

The purchasing managers’ index for November paints an equally dismal picture. The overall index, already in contractionary territory in September, fell further to a 23-month-low—it stands at 47.3, considerably below the neutral 50.0 level. The index reported falling business activity for the fourth consecutive month, with an accelerating rate of decline. Manufacturing has been particularly affected with declining factory output and a very low confidence level. Across countries, Germany experienced the steepest decline, due to its industrial focus and energy vulnerabilities. The economic situation in France, on the other hand, looks substantially more positive. The French economy, alongside the Irish economy, is still expanding.8

Consumer sentiment shows a similar, if not worse, negative trend. Consumers were expected to drive the recovery in 2022. However, the war in Ukraine, the resulting uncertainty, and record levels of inflation dismantled consumer sentiment. In September, the European Commission’s consumer climate index reached its lowest level since the survey started in 1985. Although recovering marginally in October, it still remains considerably lower than during the first wave of COVID-19. In other words, consumers are feeling the implications of a range of crises and are adjusting accordingly (figure 1).

Outlook: Difficult winter ahead

Even without gas shortages and rationing, the coming winter is expected to be a difficult one for the Eurozone. Inflation very likely has not peaked yet, which suggests it will continue to weigh on consumer spending, thus dragging down growth. The extremely low level of consumer sentiment is a harbinger of lower consumer expenditure. It is to be expected that the Eurozone economy will contract in the coming months, before inflation is likely to go down thanks to base effects, which would help real incomes to recover and growth to return in the second half of 2023.

The ECB’s survey of professional forecasters assumes only slight growth at 0.1% for all of 2023. Expectations for inflation stand at 5.8.9 While there are also gloomier outlooks available, this relatively moderate outlook—compared to the current levels of economic sentiment—implies that the Eurozone will likely face a period of stagflation, even if an outright recession might be avoided.

  1. Eurostat, “GDP up by 0.2% in both the euro area and the EU,” October 31, 2022.

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  2. Ibid.

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  3. Bruegel, “Natural gas demand tracker,” accessed November 29, 2022.

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  4. Ibid.

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  5. Deloitte, “Economy in downturn: The current view of CFOs—Deloitte CFO Survey, Fall 2022,” accessed November 29, 2022.

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  6. Eurostat, “Flash estimate—October 2022: Euro area annual inflation up to 10.7%,” October 31, 2022.

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  7. Ibid.

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  8. S&P Global, “Eurozone composite PMI: Eurozone output contracts at sharpest rate in almost two years,” November 4, 2022.

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  9. European Central Bank, Survey of professional forecasters (SPF), October 28, 2022.

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Cover image by: Jaime Austin

Deloitte Global Economist Network

The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting, and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

Dr. Alexander Boersch

Dr. Alexander Boersch

Director | Deloitte & Touche GmbH


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