EU dodges recession thanks to boost from governments

EU dodges recession thanks to boost from governments
Опубликовано: Monday, 13 February 2023 08:55

Latest Commission economic forecast shows 0.1 percent growth in last quarter of 2022.

The EU economy looks set to avoid a recession as a coordinated response from governments outweighed the ongoing fallout from Russia’s war in Ukraine, according to the European Commission.

As recently as November, the EU was on track for two consecutive quarters of negative growth — technically a recession — buffeted by the economic consequences of war, especially in energy markets.

But the eurozone narrowly escaped that by growing by 0.3 percent in the third quarter and by 0.1 percent in the last quarter of 2022, according to the Commission’s latest economic forecast. That lifted annual 2022 eurozone growth estimates to 3.5 percent, from 3.2 percent previously.

That momentum translates into higher-than-expected growth for 2023, at 0.9 percent in the eurozone and 0.8 percent in the EU, compared to 0.3 percent for both in the November forecast. Output estimates for 2024 remain unchanged, at 1.5 percent for the single currency area and 1.6 percent in the bloc.

Economic resilience is a win for the EU, which has been battling Russia through unprecedented sanctions and has had to deal with soaring energy prices and the need to wean itself off Russian energy.

"These are quite positive signs of EU resilience," said EU Economy Commissioner Paolo Gentiloni. "The better picture reflects the strength of the common response to the shocks experienced since 2020, yet Europeans still face a difficult period ahead."

Of the three countries that were forecast 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, nearly one percentage point higher than the -0.6 percent previously expected. Latvia will also escape a 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 constant or exceeding previous forecasts.

Inflation peaked

The Commission also believes headline inflation to have peaked, due to energy markets having quieted down, with gas benchmark prices returning to their pre-war levels, and oil prices also falling.

Inflation is now forecast to slow down further this year, to 5.6 percent in the eurozone and 6.4 percent against the previous guesses of 6.1 percent and 7 percent respectively, and to reach levels slightly above the 2 percent target at the end of 2024. Still, core inflation — stripped of energy and food — increased further in January.

Risks to the upside include tight labor markets — unemployment is at a historical low of 6.1 percent in December — which could generate strong wage growth and inflationary pressures. While gas storage levels remain high due to reduced consumption, refilling them ahead of next winter may prove difficult.

Continued monetary tightening by central banks could send shockwaves to indebted companies and through the banking system, as well as through mortgages, which may generate an adjustment in property markets.

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