Paolo Gentiloni – Photo © European Union 2023
(BRUSSELS) – The European Commission revised downwards its forecast for Europe’s economy Wednesday, dragged down by the impact of Russia’s war in Ukraine, weak global demand and higher consumer prices.
The Autumn 2023 Economic Forecast estimates inflation to have dropped to a two-year low in the euro area in October and is set to continue declining over the forecast horizon.
Following a robust expansion throughout most of 2022, real GDP contracted towards year-end and barely grew in the first three quarters of 2023. Still high, though declining, inflation, and tightening monetary policy took a heavier toll than previously expected, alongside weak external demand. The latest business indicators and survey data for October point to subdued economic activity also in the fourth quarter of this year, amid increased uncertainty. Overall, the Autumn Forecast projects GDP growth in 2023 at 0.6% in both the EU and the euro area, 0.2 percentage points below the Commission’s summer forecast.
Economic activity is expected to gradually pick up as consumption recovers on the back of a steadily robust labour market, sustained wage growth and continued easing of inflation. Despite tighter monetary policy, investment is projected to continue increasing, supported by overall solid corporate balance sheets and by the Recovery and Resilience Facility. In 2024, EU GDP growth is forecast to improve to 1.3%. This is still a downward revision of 0.1 pps. from the summer. In the euro area, GDP growth is projected to be slightly lower, at 1.2%.
However, uncertainty and downside risks to the economic outlook have increased in recent months amid Russia’s protracted war of aggression against Ukraine and the conflict in the Middle East. So far, the latter’s impact on energy markets has been contained, but there is a risk of disruptions to energy supplies that could potentially have a significant impact on energy prices, global output and the overall price level. Economic developments in the EU’s major trading partners, especially China, could also pose risks.
The EU labour market continued to perform strongly in the first half of 2023, despite the slowdown in economic growth. In the second quarter, activity and employment rates in the EU reached their highest level on record, and in September the unemployment rate remained at 6% of the labour force, close to its record low.
Although latest information from surveys points to some cooling and some Member States have seen an uptick in unemployment, the labour market is set to remain resilient over the forecast horizon. Employment growth in the EU is projected at 1.0% this year, before easing to 0.4% in both 2024 and 2025. The unemployment rate in the EU is expected to remain broadly stable at 6.0% in 2023 and in 2024, and to edge down to 5.9% in 2025. Real wages are expected to turn positive as of next year on the back of continued nominal wage growth and declining inflation.
The Autumn Economic Forecast for the first time covers Bosnia and Herzegovina, Moldova and Ukraine, to which the European Council granted EU candidate status last year. In Ukraine, the economy has shown remarkable resilience in 2023. Growth is forecast to reach 4.8% in 2023, 3.7% in 2024 and 6.1% in 2025, after collapsing by 29% in 2022 following Russia’s full-scale invasion.
