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Gross domestic product (GDP) grew 3.5 percent in the euro area and 3.6 percent in the European Union in 2022, according to preliminary data released by Eurostat on Jan. 31. In addition, the Eurozone economy grew 0.1 per cent quarter-on-quarter in the final three months of last year, its fourth consecutive quarter of positive growth.

Analysts said the European Union economy did better than market expectations by avoiding recession thanks to unusually warm weather this winter that partly eased the energy crisis and increased financial support from several countries. However, many EU member states are still in a stagnant state of near zero growth and have not completely escaped the risk of recession. The outlook remains bleak.

The data showed that among Europe's major economies, Germany and Italy, which were hit harder by the energy crisis, contracted slightly in the fourth quarter of last year, while France and Spain eked out modest growth.

Germany, Europe's economic powerhouse, saw its GDP fall 0.2% in the fourth quarter from the previous quarter, less than the market expected. Carsten Brzeski, head of macro research at ING, a leading financial institution, says there are few signs of a healthy recovery in Germany anytime soon, and that the government's fiscal stimulus over the past three years has only stabilized the economy, not really boosted it.

Experts believe that tight energy supply, high inflation and tighter monetary policy will be the main challenges facing the EU economy this year.

The International Energy Agency (IEA) has sounded the alarm over Europe's energy supply in 2023, urging governments to take immediate action to secure energy supplies. It expects the EU to face a shortfall of about 27 billion cubic meters of gas in 2023, or about 6.8 percent of the bloc's benchmark total gas demand.

Inflation in Europe remains stubbornly high. While inflation in the euro area fell for the first time in 17 months in November 2022 and continued to slow back to single digits in December, this is still a long way from the goal of bringing high inflation fully under control or stabilizing prices. High inflation is eroding consumers' purchasing power and domestic demand is shrinking in many European countries. After a strong rebound in consumption after the pandemic levelled off, consumers are now adjusting their spending, with Germany, France and Spain all seeing sharp contractions in household consumption, according to Bert Colleen, senior economist at ING.

Inflation levels and expectations remain well above the ECB's 2% inflation target. The ECB said it would continue to tighten funding conditions and fight inflation at all costs. Since July 2022, the ECB has raised interest rates four times in a row by a total of 250 basis points to curb inflation.

The ECB's next monetary policy meeting is on February 2. Economists widely expect the ECB to go ahead and raise rates by 50 basis points. Melanie DE Bono, senior European economist at Pantheon Macroeconomics, says the European Central Bank will continue to tighten policy aggressively to fight inflation.

Continued aggressive rate hikes by the ECB would increase borrowing costs for businesses and households, slowing economic activity. Some economists believe the Eurozone could still slip into recession.

Mr Clariant said it was uncertain whether Eurozone exports would continue to grow in a weak global economy and investment would come under pressure from higher interest rates. The euro zone economy is expected to start 2023 weak, and negative growth in the first quarter cannot be ruled out.

Andrew Kenningham, chief European economist at Capital Economics, believes the Eurozone will fall into recession in the first half of this year as the impact of monetary tightening by the European Central Bank intensifies, households struggle with a cost-of-living crisis and external demand is sluggish.

In addition, to prevent a deep recession, European governments provided substantial financial support for the "blood transfusion", leading to a significant deterioration in public finances. A weak recovery could undermine the strength of fiscal stimulus and threaten the sustainability of government debt.