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Eurozone Enters Technical Recession: Better-Positioned Country ETFs

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The Eurozone economy unexpectedly squeezed 0.1% sequentially in the first three months of 2023, compared to early estimates of a modest 0.1% rise. Figures for the final quarter of 2022 were also revised to show a 0.1% fall, instead of a flat reading, which means the Eurozone has now entered a small technical recession.

Factors Contributing to the Recession

The initial estimate of 0.1% growth in the first quarter was adjusted downward due to revisions in Germany and Ireland. Germany, a significant player in the eurozone economy, experienced a contraction, resulting in downward revisions for the region. Ireland's growth rate was revised further, displaying a contraction of nearly 5%. These downward adjustments, along with the previous quarter's negative growth, have collectively led to the technical recession.

The decline in household consumption by 0.3% in Q1 highlights the pressures faced by consumers due to inflation. Additionally, experts predict a slowdown in investment in the months ahead, adding to the concerns regarding the Eurozone's growth prospects. This lackluster economic environment raises questions about the region's ability to stimulate economic activity and foster sustained growth.

Challenges for the European Central Bank

Having pursued a hawkish monetary policy over the past year, the ECB's recent increase of its main rate to 3.25% indicates a determination to combat inflation. However, the poor economic performance limits the central bank's ability to further raise rates, potentially complicating efforts to tackle inflation effectively.

What Lies Ahead?

With the recessionary conditions and concerns over growth, the Eurozone's ability to sustain rate hikes might be compromised. iShares MSCI Eurozone ETF (EZU - Free Report) gained about 1.3% on Jun 8 probably on this cue. Moreover, economies of France, Italy and Spain expanded in Q1 despite such bleak outlook.

 Against this backdrop, below we highlight a few country ETFs that could be in sweet spots in the near term.

France – iShares MSCI France ETF (EWQ - Free Report)

The French economy advanced 0.2% sequentially in Q1 of 2023, rising from flat reading in Q4, in line with market consensus. The underlying MSCI France Index consists of stocks traded primarily on the Paris Stock Exchange.

Italy – iShares MSCI Italy ETF (EWI - Free Report)

Italy’s gross domestic product expanded by 0.6% sequentially in the three months leading to March 2023, rebounding from the 0.1% contraction in the previous quarter and revised upwards from preliminary estimates of a 0.5% growth rate.

The underlying MSCI Italy 25/50 Index measures the equity market performance in Italy. The fund charges 50 bps in fees.

Spain – iShares MSCI Spain ETF (EWP - Free Report)

Spain's economy grew by 0.5% sequentially in the first three months of 2023, following an upwardly revised 0.4% expansion in the previous period and beating market expectations of 0.3%.

The MSCI Spain 25/50 Index consists of stocks traded primarily on the Madrid Stock Exchange. The Underlying Index is a free float-adjusted market capitalization-weighted index with a capping methodology applied to issuer weights.


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