The euro area economy will grow by 2.6 percent this year and 1.4 percent in 2023, a significant markdown from May estimates of 2.7 percent and 2.3 percent, respectively, the European Commission said Thursday.
The bloc as a whole will grow by 2.7 percent this year and 1.5 percent the next, according to the EU executive.
The picture across the bloc is fragmented. Germany’s growth has been revised downward by more than one percentage point for next year, to 1.3 percent, as has Spain’s. Italy’s GDP was revised upward for this year, to 2.9 percent, but significantly downward for 2023, to 0.9 percent — the worst expected output in the eurozone.
The Commission also revised inflation upward for both years, hitting 7.6 percent in the euro area this year before easing to 4 percent in 2023, up from 6.1 percent and 2.7 percent, previously.
The EU executive now estimates the peak will happen this quarter at 8.4 percent and “decline steadily” thereafter. In the EU, inflation will reach 8.3 percent this year and 4.6 percent in 2023. But here, too, it’s a mixed picture, ranging from 5.9 percent in France to 17 percent in Estonia and Lithuania this year, and generally higher in non-euro area countries. It’s expected to recede next year to lower levels but still above target.
The downgrade is due to inflationary pressures arising from the war in Ukraine and a slowdown in global growth.
“Moscow’s actions are disrupting energy and grain supplies, pushing up prices and weakening confidence. In Europe, momentum from the reopening of our economies is set to prop up annual growth in 2022, but for 2023 we have markedly revised down our forecast,” said Economy Commissioner Paolo Gentiloni. He added that high uncertainty increases risks of further downgrades, particularly the risk of a full gas shut off from Russia, which would “bring our economy into negative territory.”
Large carryover growth from last year, stronger-than-expected economic activity in the first quarter and a promising tourism season are supporting growth for this year. But economic activity is expected to slow down as Europe heads into the winter.
“Economic activity in the remainder of the year is no longer expected to add to the annual growth figure. One could say the European economy is moving from a phase of slowing growth to one of putting on the brakes,” Gentiloni said.
But the Commission is not, for now, forecasting a recession, not even a technical one, defined as two consecutive quarters of negative growth.
That outlook is more optimistic than what some economists think. “It’s already an attempt to catch up with reality, but they’re not there yet,” said Carsten Brzeski, chief economist at ING Germany, which forecasts the euro area to contract in the fourth quarter this year and first quarter next year.
“Just looking at energy prices now, looking at an inflation, this alone is enough to push the eurozone economy at least into a mild recession in the winter,” he said.
This story has been updated.