Goldman Sachs said on Tuesday it expected the European zone's economy to expand by 0.6% this year, compared with previous forecasts of a contraction on the back of falling natural gas prices and the reopening of China's borders.
"We maintain our view that growth in the European zone will weaken over the winter months following the energy crisis but no longer see a technical recession," said Goldman Sachs economists led by Sven Jari Stehn.
Wall Street banks in November forecast a 0.1% contraction for the region. A technical recession is usually defined as two consecutive quarters of contraction in gross domestic product (GDP).
Inflation in the European zone is expected to record a reading of around 3.25% at the end of 2023 compared to the previous projection of 4.50%, said economists. In December, consumer price growth in the European zone slowed to 9.2% from 10.1% a month earlier, based on Eurostat data last week.
Core inflation for the region is also seen slowing to 3.3% by the end of the year as goods prices slow but continued upward pressure is expected on services inflation due to rising labor costs, Goldman said.
Given the still "sticky" nature of inflation, Goldman expects the European Central Bank to remain hawkish and deliver 50 basis point hikes in February and March before slowing to 25 basis points for a terminal rate of 3.25% in May.
For the UK, oldman saw a smaller contraction of 0.7% in GDP, compared to earlier expectations for it to contract by 1%, helped by lower wholesale gas prices.
As the UK labor market remains overheated, U.S. banks saw another 100 basis point hike by the Bank of England.
