The European Union economy will “nearly” avoid a much-feared recession this year as inflation eases and gas prices continue their steep decline, paving the way for better-than-expected economic performance, the European Commission said in its latest forecast .
The report, released Monday morning, offers a glimmer of good news amid a still extremely uncertain and challenging landscape intrinsically dependent on what step Russia takes next in its brutal invasion of Ukraine, which is nearing its one-year anniversary.
Nevertheless, the European Commission can forecast that the EU as a whole will register a growth rate of 0.8% in 2023 – compared to 0.3% in the previous forecast.
The euro zone, meanwhile, will expand by 0.9% compared to the 0.3% estimated in the autumn.
“Better than expected does not mean good, and the outlook is of course policy-dependent,” said Paolo Gentiloni, EU Commissioner for Economic Affairs, when presenting the forecast.
“Europeans are still facing a difficult period in which growth will remain slow and inflation will only gradually lose purchasing power.”
A technical recession is defined as two quarters of economic contraction, which could still happen in some EU countries even if the final 2023 numbers are positive.
Among the 27 Member States, Sweden is the only one to have a negative figure for this year (-0.8%), while the rest have limited but positive growth.
Germany and Italy, two countries heavily dependent on Russian fossil fuels and widely expected to fall into a painful recession, have forecast rates of 0.2% and 0.8% respectively.
For Germany, this represents a “significant turnaround,” Gentiloni said, as the industry heavyweight had forecast a -0.6% decline in the previous report.
Furthermore, France will grow by 0.6% until 2023, while the Spanish economy will grow by 1.4%.
Ireland remains the best performing economy with an impressive rate of 4.9%, driven largely by investment by foreign multinationals.
The European Commission believes the bloc has overcome record-breaking inflation and prices will resume the downward trend that began late last year when the closely-watched indicator returned to single digits.
The development has been coupled with a steady decline in European gas prices, driven by coordinated energy savings, mild weather and supplier diversification.
The Title Transfer Facility (TTF), Europe’s main hub for gas trading, closed at almost €54 per megawatt hour on Friday, a level not seen since December 2021.
Eurozone inflation is now projected to fall to 5.6% in 2023 and 2.5% in 2024, closer to the 2% annual target set by the European Central Bank (ECB).
Still, the executive warns core inflation, without fluctuating energy and food prices, has not yet peaked and the burden of high energy bills has not yet been fully passed on to consumers.
Inflation will remain “stubbornly high” in Eastern European countries, Gentiloni said.
The economy, he noted, is also waiting to feel the full impact of the continued rate hikes introduced by the ECB, which are intended to dampen demand in a bid to cool inflation.
The European Commission’s winter forecast builds on a number of forecasts that have boosted the bloc’s outlook over the past few weeks, including those of the International Monetary FundJP Morgan and Goldman Sachs and have averted the threat of a recession.
All reports have lauded the EU’s resilience and adaptability in the face of Russia’s war in Ukraine and the costly energy crisis, while emphasizing ongoing insecurity across the continent.
Gentiloni said ominous messages of “stagflation, deep recession and blackouts” that have dominated economic discourse for the last year have been “belied by reality”.
“Have we disconnected from the war? Not at all,” Gentiloni replied to a question from Euronews. “The main risks are the war of aggression in Ukraine and geopolitical tensions.”
“What I think we’ve gotten under control is the energy dependency on Russia,” he continued. “That was really impressive.”
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