The prospects for the European economy for the next few years continue to deteriorate in view of the consequences of the Ukraine war. On Friday, the EU Commission revised its forecast for economic growth in 2023 significantly downwards to 0.3 percent in the EU and the euro area. In the summer she was still expecting growth of 1.5 percent in the EU and 1.4 percent in the euro countries. Although growth is expected to be stronger than expected this year, the European economy is expected to slip into recession over the winter, according to the Commission.
In Germany, a decline in gross domestic product (GDP) is expected for the whole of next year. For this year, the analysts assume growth of 1.6 percent, but next year Germany is expected to slip into recession with a minus of 0.6 percent. That’s more pessimistic than the federal government’s forecast that GDP will contract by 0.4 percent. According to the Commission, Germany is also only one of three countries in which there is said to be a prolonged recession – alongside Sweden and Latvia.
Turning point for the EU
EU Economic Commissioner Paolo Gentiloni spoke of a “turning point for the EU economy” in view of the uncertainty caused by the war, high inflation and the energy crisis. “The economic situation has deteriorated significantly and we are heading into two quarters of downturn,” he said. From spring onwards, the economy should slowly recover.
Better than expected this year
The situation this year looks better than expected. The EU Commission predicts that the EU’s gross domestic product will grow by 3.3 percent instead of the 2.7 percent predicted in the summer for 2022. For the euro area, the authority is forecasting 3.2 percent growth instead of 2.6 Percent. This is due to the strong upswing in the first half of this year.
At the same time, the labor market is stronger than it has been for decades, with particularly low unemployment and an increase in employment of 1.8 percent. The labor market should remain resilient in the coming year as well.
Inflation hits new record
According to the forecast, inflation will reach a new high on average for the year. This year, the analysts are assuming 8.5 percent in the euro area and 9.3 percent in the entire EU. In the summer they still spoke of a price increase of 7.6 percent for the euro countries and 8.3 percent for the EU. Prices are likely to continue to rise in the coming year as well, with inflation forecast at 6.1 percent in the euro zone and 7.0 percent throughout the EU. The European Central Bank (ECB) generally aims for an inflation rate of 2 percent.
Energy spending widens budget gaps
The expenditures to relieve consumers in view of the high energy prices are tearing bigger holes in the budgets of the EU countries. The deficit in the EU is expected to increase from 3.4 percent this year to 3.6 percent next year. In principle, the EU budget rules prescribe a deficit of no more than 3 percent. Gentiloni said that EU countries’ action against high energy prices would account for 1.2 percent of GDP this year. If they continued like this next year, they could account for almost 2 percent of economic output in the EU.
At the same time, the EU’s average debt ratio is falling – also because of high inflation – since the debt was taken out before prices rose. Last year it was 89.4 percent of GDP and is expected to fall to 84.1 percent in 2024. The so-called Stability and Growth Pact stipulates debts of a maximum of 60 percent of economic output, but the rules were suspended until 2024 due to the Corona crisis.
Better prospects in 2024
The forecast for 2024 is brightening. Then the economy in the EU should grow by 1.6 percent, in the euro countries by 1.5 percent. Inflation is expected to drop to 2.6 percent in the euro area and 3.0 percent across the EU. However, Gentiloni warned that these predictions are linked to the fact that the EU can avoid a gas shortage next winter, for example by saving energy, and that the war situation does not worsen.
