This Wednesday, November 15, the European Commission lowered its growth forecasts to 0.6% in 2023 (-0.2 points) and 1.2% in 2024 (-0.1 points) in the euro zone. Brussels cites high inflation and the tightening of monetary policy which had “a stronger impact than expected”.
Although at the lowest level in two years, the rise in consumer prices remains problematic. Brussels sees it falling less than expected next year to 3.2%, compared to 2.9% forecast so far, after 5.6% in 2023 (unchanged forecast). Last September, the European executive had already significantly revised its growth forecasts downwards, while raising those concerning inflation for next year.
The European Statistical Office Eurostat confirmed on Tuesday a decline of 0.1 point in the gross domestic product of the 20 countries sharing the single currency from July to September, quarter on quarter, after stagnation over the first three months of the year and an increase of 0.2% in the second quarter.
“Moderate economic activity in the fourth quarter”
“The latest economic indicators and survey data for the month of October indicate economic activity also moderate in the fourth quarter,” the European Commission underlined on Wednesday.
“We are nearing the end of a difficult year for the EU economy. Strong price pressures and the monetary tightening needed to contain them, as well as weak global demand, have weighed on households and businesses”, underlined the Commissioner for the Economy, Paolo Gentiloni.
By 2024, “we expect a slight recovery in growth, as inflation slows, with a labor market that will remain solid”, he added, while emphasizing the fragility of any forecast in the context of global geopolitical tensions. “The ongoing conflict in the Middle East has so far had a limited economic impact outside the region, but heightened geopolitical tensions have further increased the risk of a further darkened outlook,” acknowledged the Italian commissioner.
A rebound in growth to 1.6% in 2025?
However, Brussels is counting on a rebound in growth to 1.6% in 2025 in the euro zone. The weakening of growth in Europe is closely linked to the fight against inflation led by the European Central Bank (ECB) with an unprecedented tightening of credit conditions and its main interest rate raised to the historically high level of 4%.
However, the Frankfurt-based institution warned that inflationary risks were still too high to envisage the slightest reduction. High rates reduce demand for credit, and at the same time weigh on consumption and investments by households and businesses. With falling energy prices, they helped bring inflation down to 2.9% year-on-year in October, according to Eurostat, compared to 10.6% a year ago.
“As monetary tightening takes effect on the economy, inflation should continue to fall, although at a more moderate pace,” estimates the European Commission, which expects “an easing of inflationary pressures in the food, manufactured products and services. Brussels thus sees inflation falling to 2.2% in 2025.
In this context, the European labor market should remain strong. The Commission expects the unemployment rate to be “generally stable” at 6.5% this year and next, close to its historic low of 6.4%.
On the budgetary front, Brussels plans to continue the gradual reduction of public deficits in the euro zone, to 3.2% of GDP in 2023 and 2.8% in 2024, after 3.6% in 2022, thanks to the elimination temporary support measures for households and businesses implemented in the context of the pandemic and then the energy price crisis. The reduction in deficits would result in a reduction in the debt rate which would go from 92.5% of euro zone GDP in 2022, to 90.4% in 2023 and 89.7%.