The EU is set to dodge a previously forecast recession as falling gas prices, supportive government policy and firm household spending boost the region’s outlook, according to the European Commission.
Brussels lifted its predictions for EU growth this year to 0.8 per cent, stronger than the 0.3 per cent forecast in November, and said the region would avoid a technical recession — defined as two successive quarters of economic contraction. The euro area will expand 0.9 per cent in 2023, better than the 0.3 per cent that the commission expected towards the end of last year.
The upgrades bring the commission into line with analysts, which now predict the region will dodge a recession after forecasting a severe contraction during the latter half of 2022.
The spectre of shutdowns in Russian gas supplies coupled with falling industrial output and flagging business sentiment fanned fears last autumn that the EU was heading into a deep recession.
However, a mild winter and government subsidies have also helped ease pressure on households and businesses, as Europe’s gas benchmark price fell well below levels recorded during the summer of 2022.
The region’s economy managed to avoid a contraction during the final quarter of last year — in part due to strong growth figures for Ireland.
Europe experienced its third warmest January on record, according to the EU’s Copernicus Climate Change Service. The bloc’s underground gas storage facilities have stayed unusually high for the time of year — currently 66 per cent full — raising hopes that the EU should have less need to rush to refill storage ahead of next winter.
Prospects have also improved overseas, including in China, where the easing of Covid-19 lockdown policies had prompted a positive reassessment of the growth outlook, the commission said, along with reduced supply chain interruptions.
“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,” said Paolo Gentiloni, EU economics commissioner.
“Yet 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.”
Growth this year would be markedly slower than the 3.5 per cent recorded for the EU and euro area in 2022, the commission said, warning that strong “headwinds” would continue to weigh on the outlook.
Brussels also declared that inflation had peaked, predicting that consumer price growth would be 6.4 per cent this year in the EU, down from last year’s 9.2 per cent. Euro area inflation is projected to moderate to 5.6 per cent this year from 8.4 per cent in 2022. Inflation in the single currency area will ease further to 2.5 per cent in 2024, according to the forecasts.
Real wages would continue falling in the short term given the high price rises, Brussels said, observing that core inflation, which excludes energy and unprocessed food, was still rising in January.
Higher official interest rates would start bearing down on credit flows and investment, the commission added. The European Central Bank lifted rates to 2.5 per cent earlier this month and signalled that a further half-point increase lies ahead in March.
Germany’s central bank boss Joachim Nagel, who is a member of the European Central Bank’s rate-setting governing council, warned this month there was “a great danger” that inflation could remain too high if it stopped raising rates too soon.
Risks to the growth outlook were “broadly balanced”, Gentiloni said in a press conference on Monday in Brussels. The main risk looking ahead, he added, was “the war of aggression in Ukraine and the geopolitical tensions”. However, he highlighted that it was “really impressive” that Europe had been able to manage energy dependence on Russia.
Additional reporting by Alice Hancock in Brussels
