Both economic growth and inflation in Europe are now expected to slow through the end of the year, according to a recent European Commission report.
The European Commission released its Summer 2023 Economic Forecast, on Monday 11 September 2023. This report is a key reference for investors, policymakers and analysts gauging the well-being of the European Union’s (EU) economies. The forecast offers a balanced view, replete with both optimistic and cautionary insights.
Downward revision of growth estimates
While the EU economy continues to grow, the commission has adjusted its projections downwards. Previously, growth was expected to be 1% in 2023, according to the Spring Forecast. That figure has now been revised to 0.8% for 2023 and 1.4% for 2024. The commission observed a significant deceleration in economic activity in the first half of 2023, indicating a loss of momentum.
The eurozone mirrors these trends, with its growth also being reduced to 0.8% for 2023 and 1.3% for 2024. A number of factors contribute to this decline, including weakened domestic demand, high consumer prices and the consequences of monetary policy tightening.
Despite favourable conditions like falling energy prices and a strong labour market, the latter marked by low unemployment rates and increasing wages, economic activities remain subdued.
Inflationary trends subside
A positive note in the report is the projected decline in inflation. The harmonised index of consumer prices (HICP) is expected to be 6.5% for the EU in 2023, a slight reduction from the Spring Forecast’s 6.7%. It is predicted to further decline to 3.2% by 2024.
Similarly, in the euroarea, inflation is expected to be 5.6% in 2023 and 2.9% in 2024.
Retail energy prices are expected to continue falling throughout 2023, although at a slower rate, before ticking up again in 2024 due to rising oil prices, according to the commission.
Factors such as the easing of monetary policy and the fading of post-covid stimulus will also contribute to lower inflation rates in the services sector.
Risks and implications for the future
Even as easing inflation, strong labour markets, and gradually recovering real incomes provide some cause for optimism, multiple risks loom.
Russia’s ongoing war against Ukraine and broader geopolitical instabilities introduce considerable uncertainty. Moreover, the tightening of monetary policy could potentially have more damaging effects on the economy than previously estimated, stated the report.
Notably, the EU should not expect significant support from external demand due to the stagnant outlook on global trade and growth. Nonetheless, the commission underscored that the global economy has shown some resilience, offering a glimmer of hope despite underperformance in regions like China.
A cautious outlook
The European Commission’s report underscores the importance of adaptability for businesses and governments within the EU. As Europe navigates a complex economic landscape, the report stresses that this adaptability is not just advisable, but essential for future stability.
In addition to economic uncertainties, the report also warns of geopolitical complexities that add another layer of unpredictability to the mix. Accordingly, the commission advises that preparing for a variety of scenarios is crucial. This readiness is imperative not just for navigating economic challenges but also for countering the uncertainties presented by the geopolitical climate.
The full 38-page report is available here.