The EU economy looks set to avoid recession as governments’ coordinated response to the ongoing fallout from Russia’s war in Ukraine is overshadowed. According to The European Commission.
As recently as November, the European Union was on track for two consecutive quarters of negative growth – technically a recession – from the economic consequences of the war, particularly in energy markets.
But the eurozone narrowly escaped growth of 0.3 percent in the third quarter and 0.1 percent in the final quarter of 2022, according to the Commission’s latest economic forecast. It raised the annual 2022 eurozone growth forecast to 3.5 percent from 3.2 percent.
This pace translates into higher-than-expected growth for 2023, at 0.9 percent in the eurozone and 0.8 percent in the European Union, compared with 0.3 percent for both in the November forecast. Output projections for 2024 remain unchanged, at 1.5 percent for the single currency area and 1.6 percent across the block.
Economic resilience is a win for the EU, which has been battling Russia through unprecedented sanctions and has had to deal with rising energy prices and the need to distance itself from Russian energy.
“These are very positive signs of the EU’s resilience,” said Paolo Gentiloni, EU Economic Commissioner. “The better picture reflects the strength of the common response to the shocks experienced since 2020, yet Europeans still face a difficult period.”
Of the three countries projected to record negative growth in 2023, only Sweden is expected to fare worse than expected at -0.8 percent. Germany, the bloc’s economic engine, is expected to remain in positive territory this year, at 0.2 percent, almost a percentage point higher than the -0.6 percent previously expected. Latvia will also avoid recession, growing at 0.1 percent this year.
Among other EU members, only Estonia, Lithuania and Poland saw their growth revised slightly downward, the others remaining stable or exceeding previous forecasts.
inflation at its peak
The Commission is also of the view that headline inflation has peaked as energy markets calm, gas benchmark prices return to their pre-war levels and oil prices also decline.
Inflation is now forecast to slow further this year, to 5.6 percent in the eurozone and 6.4 percent against previous projections of 6.1 percent and 7 percent, respectively, and reach a level slightly above the 2 percent target in late 2024. Nevertheless, core inflation – anchored by energy and food – rose further in January.
Upside risks include tight labor markets — unemployment hit a historic low of 6.1 percent in December — which could create stronger wage growth and inflationary pressures. While gas storage levels remain high due to low consumption, it may prove difficult to refill them before the next winter.
Continued monetary tightening by central banks can send shocks through indebted companies and the banking system as well as mortgages, which can generate adjustments in asset markets.