Europe, which it was feared would dip into a recession in the last quarter of 2022, managed to avoid contraction at the end of last year. The most recent interim forecasts suggest that the Eurozone will avoid recession this year too, and manage to eke out small economic growth, also thanks to the lower energy prices than in the spring and summer of 2022 following the war and the subsequent major change in global energy trade. 

The European Commission last month revised down slightly its inflation forecasts for the EU economy and revised up the economic growth outlook for 2023, saying that the EU economy is set to avoid recession this year.

Germany, Europe’s biggest economy, is now expected to see 0.2% growth, compared to an earlier forecast of a 0.6% contraction, “a significant turnaround driven by abating energy prices, gradual adjustment of supply chains and policy support to households and firms,” European Commissioner for Economy, Paolo Gentiloni, said, commenting on the Winter 2023 Economic Forecast. 

“The EU economy entered 2023 on a healthier footing than expected, and looks set to escape recession,” Gentiloni noted. 

The U.S., however, may not avoid recession when the interest rate hikes fully catch up with economic activity.

Globally, economic growth prospects for 2023 have improved significantly since December, Fitch Ratings said in its latest Global Economic Outlook (GEO) report last week. 

“But the impacts of rate hikes on the real economy still lie ahead and are likely to push the US economy into recession later this year,” the rating agency added. 

In the first upgrade to its year-ahead global growth forecast since the war, Fitch noted the improvement in the near-term outlook reflecting market’s reopening, “a material easing of the European natural gas crisis, and surprising near-term resilience in US consumer demand.”

But the lagged effect of the Fed and ECB interest rate hikes will be felt later this year and next year, Fitch warned.  

“Central banks are now taking away the punchbowl quite quickly. It is only a matter of time before the impact on the real economy becomes much more visible,” said Brian Coulton, Chief Economist at Fitch Ratings.