The European economy continues to show resilience in a challenging global context and is now expected to grow more than expected over the coming two years.
This is due to lower energy prices, abating supply constraints and a strong labour market that supported moderate growth in the first quarter of 2023, dispelling once and for all fears of a recession.
These were the main findings from the European Commission, which presented its Spring Forecast in Brussels on Monday.
This better-than-expected start to the year lifts the growth outlook for the EU economy to 1.0% in 2023 (up from 0.8% in the Winter Interim Forecast) and 1.7% in 2024 (1.6% in the winter), according to the data.
Upward revisions for the euro area are of a similar magnitude, with GDP growth now expected at 1.1% and 1.6% in 2023 and 2024 respectively.
Ireland is expected to post the highest growth of the bloc’s 27 member states with 5.5% this year and 5.0% in 2024. Sweden and Estonia are however seen contracting this year with GDPs of -0.5% and -0.4% respectively. For the Baltic country, 2023 should therefore be the second year in a row with negative growth but it is then forecast to rebound strongly and grow by 3.1% in 2024.
The bloc’s economic powerhouse, Germany, should meanwhile post anemic growth this year of just 0.2%, followed by 1.4% next year. France should fare a bit better this year — 0.7% — and double that the following year.
But it’s not all good news. On the back of persisting core price pressures, inflation has also been revised upwards compared to the winter, and is now forecast to reach 6.7% in 2023 and 3.1% in 2024 with lower forecast for the euro area.
Hungary will be the most impacted, with inflation seen reaching 16.4% this year, followed by Czechia and Poland with readings close to 12%.
Luxembourg, Belgium and Spain should have the lowest inflation readings — between 3% and 4% — this year.
“The EU economy is holding up remarkably well in the face of Russia’s aggression against Ukraine, leading to an upgrade in today’s growth forecast for 2023”, said Valdis Dombrovskis, Executive Commission Vice-President in a statement.
“With energy prices clearly down, governments should be able to phase out support measures and reduce their debt burdens.”
Markedly lower energy prices are working their way through the economy, reducing firms’ production costs. Consumers are also seeing their energy bills fall, although private consumption is set to remain subdued as wage growth lags inflation.
After peaking in 2022, headline inflation continued to decline in the first quarter of 2023 amid a sharp deceleration of energy prices. Core inflation (headline inflation excluding energy and unprocessed food) is, however, proving more persistent.
In March it reached a historic high of 7.6%, but it is projected to decline gradually over the forecast horizon as profit margins absorb higher wage pressures and financing conditions tighten.
“Inflation has proved stickier than expected but it is forecast to decline gradually over the remainder of 2023 and in 2024. And the improvement in public finances is set to continue as energy support measures are progressively withdrawn”, EU Economy Commissioner Paolo Gentiloni told reporters.
The Commission publishes two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) each year. The interim forecasts cover annual and quarterly GDP and inflation for the current and following year for all Member States, as well as EU and euro area aggregates.
The European Commission’s Summer 2023 Economic Forecast will update GDP and inflation projections and is expected to be presented in July 2023.