The eurozone’s economy is expected to grow this year at a faster pace than previously thought, after a better-than-expected start to 2023, supported by easing energy prices and a strong labor market, according to the European Union’s executive body.
The European Commission said Monday in quarterly forecasts that gross domestic product in the eurozone is expected to grow 1.1% in 2023, higher than the 0.9% increase anticipated in February.
The economy performed above expectations after weathering the energy crisis sparked by Russia’s invasion of Ukraine, thanks to a diversification of supply and a sizeable fall in gas consumption, the EU said.
“The European economy continues to show resilience in a challenging global context. Lower energy prices, abating supply constraints and a strong labour market supported moderate growth in the first quarter of 2023, dispelling fears of a recession,” the EU said.
Gross domestic product grew 0.1% in the eurozone in the first quarter, according to preliminary estimates released late in April, and leading indicators suggest continued growth in the second quarter, according to the EU.
In 2024, the EU sees economic growth higher too, at 1.6%, up from 1.5% under previous forecasts. However, the figures are a steep fall from the 3.5% growth recorded in 2022.
Persisting price pressures also mean inflation forecast for the eurozone has been lifted, indicating further squeezing of household and business spending, to 5.8% in 2023, from 5.6% under previous forecasts, and 2.8% in 2024 from 2.5% previously thought.
While headline inflation declined in the first quarter, to 7.0% in April from a high of 10.6% in October 2022, core inflation, which excludes more volatile energy and food prices, is proving more persistent.
The EU forecasts core inflation to average at 6.1% in the euro area in 2023, before falling to 3.2% in 2024, above the headline rate in both years. However, the latest inflation data said core inflation had fallen in April, suggesting it might have peaked in the first quarter.
As inflation remains elevated, the European Central Bank has hiked rates further, with its key deposit rate rising to 3.25% at its latest meeting earlier in May. Though the ECB is expected to be nearing the end of its hiking cycle, financing conditions are set to tighten further, the EU said.
Recent turbulence in the financial sector will likely add pressure to the cost and ease of accessing credit, slowing down investment and hitting residential investment, it said.
Meanwhile, the eurozone’s labor market remains strong, hitting a new record low of 6.5% in March, and is expected to react only mildly to the slower pace of economic growth.
However, wage growth, although having picked up, has so far remained well below inflation, though labor-market tightness, increases in minimum wages and pressure from workers should recoup some of the lost purchasing power, the EU said.
But even as growth forecasts have improved, downside risks to the economic outlook have increased, the EU said. More persistent core inflation will be increasingly painful for households and force a stronger response from the ECB, while risking renewed financial stress. There is also continued uncertainty from the Ukraine war, it added.
Write to Ed Frankl at [email protected]
