The European Commission has worsened the forecast for the economies of the EU and eurozone

Over the next year and a half, the European economy will grow more slowly than expected. This follows from the new forecast of the European Commission (EC): estimates of GDP growth in 2023 and 2024 have worsened both for the euro area and for the EU as a whole. Despite the continued decline in energy prices, statistics and leading indicators recorded weak business activity in Europe over the summer. The impulse for growth in the services sector has almost exhausted itself, and the industrial sector has weak indicators, the EC notes. Germany made a significant contribution to the worsening forecasts: Europe’s largest economy is expected to contract by 0.4% by the end of 2023.

The European Commission has worsened its forecasts for the economy of the euro area and the European Union for 2023 and 2024. Eurozone GDP growth is expected to be 0.8% this year (the EC’s spring forecast assumed growth of 1.1%), next year it will be 1.3% (1.6%). The EU’s GDP is expected to grow by 0.8% and 1.4% (versus previously expected 1% and 1.7%), respectively. Referring to statistical data and leading indicators, the European Commission notes that business activity in European countries remains “restrained” due to the tightening of the ECB’s monetary policy and still high inflation.

In August, the economic sentiment indicator (ESI) in the euro area, remaining below the 100 point mark that separates growth from contraction in business activity, fell to 93.3 points (94.5 in July) – this is the lowest since November 2020. The composite PMI of the euro area was also in the negative zone (below the 50 point mark) in August: 46.7 points after 48.6 in July. Although Eurostat data on industrial production for the second quarter turned out to be slightly better than forecasts (see Kommersant on August 17), the EC points to continued weakness in industry. The situation in services is also deteriorating – demand for them continues to decline due to inflationary pressure. In August, for the first time since the end of 2022, the PMI index for this sector was below 50 points: 47.9 points after 50.9 points in July.

The EC review also revised growth estimates for some euro area economies. Thus, new forecasts for 2023 suggest slower GDP growth in Italy and the Netherlands: by 0.9% and 0.5% (versus 1.2% and 1.8% in May estimates), respectively, and faster growth in France and Spain: by 1% and 2.2% respectively (instead of 0.7% and 1.9%). The most pessimistic estimates in the review are given for Germany: Europe’s largest economy will shrink by 0.4% this year (in the spring forecast, growth of 0.2% was expected). The EC’s fears are confirmed by statistical data published last week, demonstrating a decline in industrial production in this country for the third month in a row.

The European Commission believes that a further increase in ECB rates could, on the one hand, put more serious pressure on economic activity than previously expected, and on the other hand, weaken inflation. Let us note that statistical data is now putting multidirectional pressure on the regulator (its meeting will be held this week). Probably, taking this into account, the European Commission does not give specific forecasts about the further actions of the ECB.

At the same time, the review provides updated estimates of inflation: it is assumed that this year in the euro area it will be 5.6% (5.8% in the spring review), next year it will be 2.9% (2.8%). In the EU countries – 6.5% (6.7%) in 2023 and 3.2% (3.1%) in 2024. This revision is explained by expectations of further dynamics of energy prices: the EC believes that this year they will continue to decline, but more slowly than in the first half of the year, and will rise again in 2024.

Kristina Borovikova