EU downgrades growth forecast and raises inflation expectations

The EU economy will expand by just 0.8 per cent this year and 1.4 per cent in 2024, according to European Commission figures that lowered growth predictions and signalled the persistence of inflation.

Monday’s figures marked a downgrade from predictions by Brussels in May of 1 per cent growth this year and 1.7 per cent in 2024, as high prices and a shrinking German economy hit consumer spending across the bloc.

“The EU economy has lost momentum since spring,” said Paolo Gentiloni, the European commissioner for the economy. “Economic activity stalled in the second quarter and survey indicators point to further weakening in the coming months.”

The growth revision comes as the European Central Bank prepares for a pivotal decision on Thursday on whether to raise rates to contain high inflation in Europe, or to keep rates on hold to prevent worsening the downturn.

The commission added that inflation would fall to 6.5 per cent this year — lower than its previous forecast of 6.7 per cent. But it cautioned that inflation would remain at 3.2 per cent in 2024, 0.1 percentage points higher than previously anticipated.

Line chart of Gross domestic product (% quarterly change since Q4 2019) showing Europe's economy has lagged behind the US since the pandemic

Europe’s economic outlook has weakened in recent months because of a downturn in manufacturing, faltering trade with China, a reduction of government support measures and squeezed consumer spending due to high inflation and rising borrowing costs.

“High and still increasing consumer prices for most goods and services are taking a heavier toll than expected” in previous forecasts, the commission said.

The new figures predict a contraction in German real gross domestic product of 0.4 per cent, compared with a previously forecast rise of 0.2 per cent. The German economy will still grow by 1.1 per cent in 2024 but at a slower rate than expected in Brussels’ spring forecast.

Italy also suffered a 0.3 percentage point downward revision for both 2023 and 2024, leading to 0.9 per cent and 0.8 per cent growth in each year.

The deteriorating prospects for the region’s economy, underlined by a downward revision to the official eurozone growth figure for the second quarter from 0.3 per cent to 0.1 per cent, have increased expectations that the ECB will pause its interest rate rises on Thursday.

However, concern remains about eurozone inflation, which is well above the ECB’s 2 per cent target, even though it has halved from an all-time high of 10.6 per cent last October to 5.3 per cent in August.

Upward pressure on inflation is coming from rising oil prices and a weakening euro that pushes up import costs, meaning another rate increase by the ECB remains a possibility.

The largely unchanged outlook for global growth and trade means that the EU cannot rely on demand from other countries to support its economy, the commission added.