Goldman Sachs no longer expects recession in euro zone in 2023

Goldman Sachs

Goldman Sachs said on Tuesday it expects the euro zone economy to grow by 0.6% this year, compared with its previous forecast of a contraction, thanks to a fall in natural gas prices and the reopening of China's borders.

"We maintain our view that Euro area growth will be weak over the winter months given the energy crisis but no longer look for a technical recession," Goldman Sachs economists led by Sven Jari Stehn said in a note.

The Wall Street bank had in November forecast a 0.1% contraction for the region. A technical recession is typically defined as two consecutive quarters of contraction in gross domestic product (GDP).

Euro zone inflation is expected to be around 3.25% at the end of 2023 compared with 4.50% forecast earlier, the economists said.

In December, consumer price growth across euro zone slowed to 9.2% from 10.1% a month earlier, Eurostat data showed last week.

Core inflation for the region is also seen slowing to 3.3% by the year-end as goods prices cool, but continued upward pressure is expected on services inflation due to rising labour costs, Goldman said.

Given the "sticky" nature of inflation, Goldman expects the European Central Bank to remain hawkish and deliver 50 basis points hikes in February and March before slowing to 25 bps for a terminal rate of 3.25% in May.

For the UK, Goldman sees a smaller contraction of 0.7% in GDP, compared with an earlier expectation for it to shrink by 1%, helped by lower wholesale gas prices.

As the UK labour market remains overheated, the U.S. bank sees another 100 bps worth of hikes by the Bank of England.