Paolo Gentiloni – Photo © European Union 2023
(BRUSSELS) – The European Union lowered its growth forecast for Europe’s economy Monday, with weak demand and consumption, and high and increasing consumer prices taking a heavier toll than expected.
The European Commission’s Summer 2023 Economic Forecast reported the economy continuing to grow, albeit with reduced momentum. The forecast revises growth in the EU economy down to 0.8% in 2023, from 1% projected in the Spring Forecast, and 1.4% in 2024, from 1.7%. It also revises growth in the euro area down to 0.8% in 2023 (from 1.1%) and 1.3% in 2024 (from 1.6%).
Inflation is expected to continue to decline over the forecast horizon. Harmonised index of consumer prices (HICP) inflation is now projected to reach 6.5% in 2023 (compared to 6.7% in the spring) and 3.2% in 2024 (compared to 3.1%) in the EU. In the euro area, inflation is forecast to be 5.6% in 2023 (compared to 5.8%) and 2.9% in 2024 (compared to 2.8%).
Economy Commissioner Paolo Gentiloni paid tribute to the resilience of the European economy in avoiding a recession last winter. However, “the multiple headwinds facing our economies this year have led to a weaker growth momentum than we projected in the spring. Inflation is declining, but at differing speeds across the EU. And Russia’s brutal war against Ukraine continues to cause not only human suffering but economic disruption.”
Lower growth comes despite declining energy prices and an exceptionally strong labour market, which has seen record low unemployment rates, continued expansion of employment, and rising wages.
The weaker growth momentum in the EU is expected to extend to 2024, says the report, and the impact of tight monetary policy is set to continue restraining economic activity. However, a mild rebound in growth is projected next year, as inflation keeps easing, the labour market remains robust, and real incomes gradually recover.
Inflation continued easing in the first half of 2023 as a result of declining energy prices and moderating inflationary pressures from food and industrial goods. In the euro area, it reached 5.3% in July, exactly half of the peak level of 10.6% recorded in October 2022, and remained stable in August.
Energy prices are set to continue declining for the remainder of 2023, but at a slowing pace. They are projected to increase slightly again in 2024, driven by higher oil prices.
The outlook is challenged by risks and uncertainty. Russia’s ongoing war of aggression against Ukraine and wider geopolitical tensions continue to pose risks and remain a source of uncertainty.
While mounting climate risks, illustrated by the extreme weather conditions and unprecedented wildfires and floods in the summer, also weigh on the outlook.
