By Joshua Kirby and Ed Frankl
The eurozone is likely to grow at a slower pace than previously expected this year and next amid weak domestic consumption and flagging global demand, with the powerhouse German economy notably set to shrink, according to fresh figures published by the European Union executive Monday.
The 20-member bloc should book growth of 0.8% this year and 1.3% in 2024, revised down from previous estimates in May of 1.1% and 1.6%, respectively, according to the European Commission.
Weak private consumption amid stubbornly high inflation lies behind the gloomier outlook for economic growth, the EC said.
“High and still increasing consumer prices for most goods and services are taking a heavier toll than expected in the spring forecast,” the commission said. Eurozone consumer prices rose 5.3% in August, failing to ease from the previous month.
The forecasts come ahead of a key European Central Bank rate-decision meeting on Thursday, when the central bank will publish its own forecasts for the bloc’s economy and inflation. The bank is widely expected to lower its estimates for growth this year.
The bloc’s economy notched growth of just 0.1% in the April-June period, according to revised figures published last week, and many economists expect the eurozone to stagnate in the second half of the year.
Germany’s economy–the largest in the bloc–is now expected to contract, according to the EC’s new estimates. Gross domestic product should be 0.4% lower on year in 2023, compared with a previous estimate of slight growth. It would be the only one of the bloc’s major economies to slip backward, according to the forecasts, which see slightly higher growth for France and Spain than previously estimated.
Closely watched economic forecasters including the German Institute for Economic Research and the Kiel-based IfW Institute last week ticked down their own expectations for German growth, which has been hamstrung by weaker industrial output.
Inflation in the eurozone is meanwhile expected to stand at 5.6% for 2023 as a whole, a slightly lower forecast than the 5.8% previously estimated by the EC. However, inflation is set to ease less rapidly next year than previously forecast, with prices to rise by 2.9% on year rather than by 2.8%, according to the new estimates.
The higher forecast comes despite an easing of the energy bills that spiked last year after Russia’s fullscale invasion of Ukraine, the commission said. Higher oil prices might slow the downward trajectory of inflation next year, but prices for services and food should ease steadily amid high interest rates, lower input prices and smoother supply chains, the commission said.
Nevertheless, a tighter monetary policy–with an unprecedent cycle of interest-rate rises by the ECB with the aim of stemming inflation–has begun to feed into the wider economy, damping industrial production and demand, the EC said. Industrial output is weakening and services growth is fading, despite resurgent tourism in many eurozone members, it said.
The sluggishness should continue next year, with little prospect of a major rebound in growth, the EC said. Global demand remains weak as the Chinese economy grinds to a halt, the commission said, meaning the bloc can’t rely on external demand to offset lower domestic consumption.
Nevertheless, lower inflation, continued strength in the jobs market and resultant rises in real wages offer some bright spots for the coming year, the commission said. The bloc’s labor market has remained “exceptionally strong,” with record low unemployment rates and rising wages, it said.
“Monetary tightening may weigh on economic activity more heavily than expected, but could also lead to a faster decline in inflation that would accelerate the restoration of real incomes,” it said. The Russia-Ukraine conflict continues to cast a pall of uncertainty over the outlook, the EC said, as does the climate crisis, which has led to disastrous wildfires and floods in many parts of the continent over the summer.
Write to Joshua Kirby at [email protected]; @joshualeokirby, and to Ed Frankl at [email protected]
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