EU economic forecasts: Inflation past its peak, no recession

The EU's executive branch published revised economic forecasts on Monday, saying the bloc will narrowly avoid a technical recession and has already passed its inflation peak as natural gas prices continue to retreat from the historic levels of mid-to-late 2022.

But the European Commission also warned that consumers would continue to feel the pinch of reduced purchasing power as inflation remains above 5%. 

"The EU economy beat expectations last year, with resilient growth in spite of the shockwaves from the Russian war of aggression," Commissioner for the Economy Paolo Gentiloni said. "And we have entered 2023 on a firmer footing than anticipated: the risks of recession and gas shortages have faded and unemployment remains at a record low."

What are the Commission's growth forecasts? 

Growth for 2023 should reach 0.8% for the 20 countries using the euro single currency, and 0.9% for the 27-member bloc as a whole, the Commission said. That's compared to forecast growth of 0.3% in its previous quarterly report. 

The Commission also forecast that the bloc would avoid a contraction in the current January-March quarter, and thereby narrowly stave off a technical recession. This follows growth of just 0.1% in the previous quarter. 

Many economists classify a technical recession as two consecutive quarters of negative growth. But by the EU's measuring system, the previously-forecast first quarter performance coupled with the last quarter of 2022 would have qualified as a technical recession.

Longer-term growth forecasts for 2024 remained unchanged, at 1.6% for the EU and 1.5% for the eurozone.

"Europeans still face a difficult period ahead. Growth is still expected to slow down on the back of powerful headwinds and inflation will relinquish its grip on purchasing power only gradually over the coming quarters," Gentiloni said.

"Thanks to a unified and comprehensive policy response, the EU has weathered the storms that have hit our economies and societies since 2020. We must show the same resolve and ambition in tackling the challenges we face today." 

And what about inflation? 

For 2023 as a whole, inflation was forecast to be 5.6% within the eurozone and 6.3% across the entire EU.

Inflation peaked last October at 10.6% in the eurozone but has been falling since, reaching 8.5% in January. The EU believes that falling gas prices, partly as the EU secures alternative sources of supply and compensates for the halt of Russian imports, explain this — but it warns that pressures on the prices of other goods is less likely to decrease. 

"The decline was driven mainly by falling energy inflation, while core inflation has not yet peaked," the Commission said in a press release on Monday. 

The European Central Bank (ECB) has been raising interest rates in a bid to slow inflation. The aim is to discourage some borrowing and spending by making credit more expensive, but this can also have a negative impact on economic output.

Currently, the Commission predicts inflation much closer to the ECB target level of 2%, at around 2.8% for the whole bloc, in 2024. 

The report also points to record low unemployment in the EU, at 6.1% at the end of 2022, as a bright spot helping to counteract the economic impacts following the COVID pandemic and amid Russia's invasion of Ukraine. 

"Europe's economy is proving resilient in the face of current challenges. We were able to narrowly avoid a recession. We are somewhat more optimistic about growth prospects and the projected decline in inflation this year," the Commissioner for Trade Valdis Dombrovskis said.

"But we still face multiple challenges, so this is no time for complacency — not least because Russia's relentless war against Ukraine is still causing uncertainty." 

The Commission also referred directly to this uncertainty in its press release, noting that its current forecast "crucially hinges on the purely technical assumption that Russia's aggression of Ukraine will not escalate but will continue throughout the forecast horizon." 

msh/fb (AP, dpa, Reuters)