High inflation and weak external demand took a heavier toll than expected
The outlook for the European Union economy remains pessimistic and effective paths for its recovery appear out of sight, experts said, as domestic and external challenges remain.
The bloc’s economy has lost momentum this year amid a high cost of living, weak external demand and monetary tightening, according to the European Commission’s autumn economic forecast published on Wednesday.
The Commission said the EU’s real GDP barely grew in the first three quarters of 2023. High inflation, although falling from its peak, and monetary tightening, together with weak external demand, took a heavier toll than previously expected.
While economic activity is expected to gradually recover in the future, the Commission has cut its forecast for economic growth in both the EU and the euro zone this year to 0.6 percent, 0.2 percentage points below the Commission’s summer forecast lies.
Next year, EU GDP growth is expected to improve to 1.3 percent. This is still a downward revision of 0.1 percentage points below the summer forecast. In the euro area, GDP growth is likely to be slightly lower at 1.2 percent.
Inflation remains on a downward trend. According to estimates, it fell to 2.9 percent in the euro area in October from its peak of 10.6 percent a year ago. This marks the lowest level since July 2021.
Charles Seville, senior director of economics at Fitch Ratings, said most of the decline in the euro zone inflation rate since peaking in October 2022 was due to the decline in energy prices after their rise in the third quarter of last year. However, this disinflationary process in the energy sector is coming to an end. Last quarter, energy prices once again became a source of inflationary pressure.
monetary policy
The task of monetary policy is now to help reduce core inflation. It is clear that the European Central Bank’s tightening measures are now starting to have an impact on reducing core inflation, although it remains well above target, he said.
He said the euro zone as a whole will grow faster next year than this year, but growth will remain weak. Disinflation will strengthen purchasing power and support consumer demand, which stagnated last year. There are still many jobs and unemployment is low. However, monetary tightening is clearly having an impact on credit and investment.
In addition, structural issues such as low labor force growth and the ongoing impact of the gas supply and price shock, particularly in Germany, would weigh on potential growth rates in the euro zone, he added.
Chen Fengying, a senior researcher in global economics at the China Institutes of Contemporary International Relations, said the European economy has long faced the problem of structural imbalance, and the lack of innovation capability and high social security system have also become important factors affecting the Limit development of economic recovery in the Eurozone.
The EU has continuously pushed forward structural reforms and vigorously promoted the transformation of the digital economy and green economy in recent years, but the effect is not obvious. The German economy is also facing major difficulties that are slowing the pace of Europe’s economic recovery, she added.
The German economy is expected to shrink by 0.3 percent this year as a loss of purchasing power due to high inflation and tightening financing conditions weigh on consumption and investment, the European Commission said on Wednesday.
Chen said Europe’s economic recovery was also affected by geopolitical challenges. The Russia-Ukraine conflict has led to disruptions in global supply chains, rising energy and raw material prices, and volatility in global financial markets, exacerbating the inflation problem in Europe. An escalation of the ongoing Israeli-Palestinian conflict could also drive up prices for energy imports to Europe and worsen the already weakening economy in the euro zone.
In addition, some EU politicians called for de-risking vis-à-vis China and politicizing business affairs, which have also led to economic losses, she added.
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