It was the writing ominously scratched on the wall: the eurozone was heading for a deep and calamitous recession, blamed on Russia's war in Ukraine, a devastating energy crisis and soaring inflation.
The fateful forecast, made as soon as Russian tanks illegally crossed the border into Ukraine in late February 2022, topped headlines around the continent and unleashed a sentiment of profound pessimism among consumers and investors, who gradually resigned themselves to the third economic contraction in less than three years.
But then, as the year turned, something shifted and a glimmer of optimism found its way through the gloom.
The "news has become much more positive in the last few weeks," said European Central Bank Christine Lagarde while attending the World Economic Forum in Davos last week.
"It's not a brilliant year but it is a lot better than what we had feared."
Just days earlier, Paolo Gentiloni, the European Commissioner for the economy, had made an even bolder prediction.
"There is a chance to avoid a deep recession and maybe enter a more limited, shallow contraction," Gentiloni told reporters in Brussels.
"Of course, this is very much depending on our policies."
'On the edge of recession'
The sudden mood change across the bloc is attributed to a series of positive developments that materialised around the turn of the year. Chief among them: a steady fall in gas prices.
Prices at the Transfer Title Facility (TTF), Europe’s leading gas trade hub, have fallen below €70 per megawatt-hour, levels not seen since before Russian President Vladimir Putin decided to launch the invasion of Ukraine.
An unseasonably warm start of the year, coupled with strong underground storage to satisfy extra demand and consistent arrivals of liquefied natural gas (LNG) to European shores, appear to have injected a degree of certainty into the until-now explosive market.
"This is a big deal for an energy-importing region like the Euro area, reversing a significant part of the income shock and sharply reducing the risk of forced gas rationing," J.P. Morgan said in a mid-January economic update titled "Hello lower gas prices, Bye-bye recession."
The respite has been greatly welcomed, to say the least: Europe’s manufacturing sector had for months walked a tightrope between keeping engines running or filing for bankruptcy. Overnight, factories were compelled to redesign their long-established supply chains and adapt their daily operations to the abrupt disappearance of cheap Russian fossil fuels.
"Both consumers and producers have made great efforts to deal with consumption," Maria Demertzis, a senior fellow at Bruegel, a Brussels-based think tank, told Euronews.
"A very interesting observation is that industries managed to reduce their gas consumption without a corresponding reduction in production as they have been very inventive in the process. This is great news for the resilience and adaptability of our industry."
"I would actually be optimistic about the prospects," Demertzis added.
The gargantuan effort has certainly not come cheap: Bruegel estimates that, since September 2021, European countries have earmarked more than €705 billion to shield vulnerable citizens and struggling firms from the cruellest impact of the energy crisis.
The continued disbursements of direct support and subsidies have stretched public coffers but eventually paid off, said Peter Vanden Houte, ING’s chief economist for the eurozone.
"We have seen confidence increasing somewhat over the last two months, which means that consumption is likely to remain a bit more resilient. That said, it is not all rosy either," Vanden Houte told Euronews.
"Manufacturing companies and retailers are sitting on a huge inventory of unsold goods and that could weigh on production. On top of that, the strong interest rate increases are likely to cause a downturn in real estate and in the construction sector in the course of the year."
Still, the eurozone is "probably" going to escape two consecutive quarters of economic contraction – the classic definition of a recession – and will instead enter a period of subdued growth, Vanden Houte said.
A similar upwards revision was recently made by Goldman Sachs, which opened its January report with the question “Will the Euro area economy go into recession” and clearly answered: “No, we upgraded our forecasts and no longer expect a technical recession."
The Goldman Sachs team listed three main reasons to back their new forecast: "surprisingly resilient" data from Europe's industrial sector, the sharp drop in gas prices and the reopening of the Chinese economy after months of draconian lockdowns.
As a result, the investment bank now predicts expansion rates of 0.1% for both the first and second quarter of 2023, up from -0.4% and -0.1%, respectively, in the previous forecast, to lead to an 0.6% figure by the end of the year.
"We thus look for a period of growth weakness rather than a recession over the winter months, although the probability of a technical recession remains elevated at 40% over the next year," Goldman Sachs said in a note to investors, seen by Euronews.
The report, however, underlined that growth among the 20 countries that use the euro as a currency would vary considerably, with Germany and Italy, two states that were heavily reliant on Russian fossil fuels, still standing "on the edge of recession."
The fall in gas prices celebrated by economists and analysts has given rise to yet another vital question: Has inflation in the eurozone finally peaked?
The latest numbers released by Eurostat seem to indicate it has indeed: inflation in the eurozone has fallen from an unprecedented high of 10.6% in October to 9.2% in December.
The return to single-digit territory took many by surprise and further fuelled the wave of optimism, even if core inflation, which excludes the volatile prices of energy and food, remains stubbornly elevated.
More encouraging signs kept pouring in: flash data released this month by the European Commission showed that consumer confidence across the eurozone has begun to crawl its way back from a historical low of -28.7% in the late summer when gas prices at the TTF broke all-time records and sent policymakers into panic mode.
Consumer confidence now stands at -20.9%, an abysmal figure still but the best seen since February.
"The rebound in consumer sentiment over recent months points to a levelling off of the decline in retail sales," said Ken Wattret, vice-president of analysis and insights at S&P Global Market Intelligence, in an email to Euronews.
Wattret noted the eurozone's trade balance, which turned from surplus to deficit in 2021 as energy imports became increasingly costly, continues to narrow in the bloc's favour, reaching a deficit of €11.7 billion in November, the lowest figure recorded since February.
Unemployment, another must-watch indicator, remains stable and below the 7% threshold, suggesting the dreaded scenario of companies forced to lay off thousands of workers to make ends meets has not come to pass – or at least not yet.
"While the source of much conjecture at present, in our view whether the eurozone records small declines or small increases in real GDP is rather a sideshow," Wattret said.
"The key issue is that the risk of a severe recession, with potential knock-on effects on unemployment, the financial sector, asset prices, etc, has receded markedly since autumn 2022."
Oliver Rakau, chief German economist at Oxford Economics, admitted that in recent weeks "good news has clearly outweighed the bad news" but adopted a more cautious approach when asked if the eurozone was out of the woods, raising concerns about the bloc’s long-term competitiveness.
"Energy prices will still remain way higher than in other regions of the world than before the war in Ukraine and many firms will have hedged at least part of their energy needs for this year at last year’s high levels," Rakau told Euronews.
"So, energy-intensive firms will still need to judge if a continued presence in Europe is tenable."
In Rakau’s view, the eurozone’s economic woes need to be perceived through the broader lens of a global economic slowdown and sluggish demand, which lower energy prices "do little to bolster."
Besides, he added, the shockwaves from the aggressive hikes in interest rates by the European Central Bank are yet to be fully felt by citizens and companies.
The ECB has embarked on a "whatever-it-takes" mission to tame inflation and is expected to increase rates by 50 basis points in both February and March.
"While we have softened the downturn that we expect to materialise and think that the balance of risk has become more balanced, we are not yet convinced that the eurozone will avert a (technical) recession," Rakau said.
"Several of the headwinds look too entrenched to reverse quickly."