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29th Sep 2023

Inflation prompts Commission to cut EU growth forecast

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The Commission has revised down its forecast for the EU economy in the near term due to subdued economic activity.

In its summer economic forecast, the EU executive's technical team adjusted the bloc's growth from 1 to 0.8 percent for 2023 and from 1.7 to 1.4 percent for 2024. And while the EU-27 economy as a whole will continue to grow, it will do so at a slower pace.

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Among the factors behind these new estimates are economic activity affected by weak domestic demand, and a modest global growth (with a weak performance in China).

And despite record unemployment and falling energy prices, the main impact of inflation has been on consumption, which has been hit harder than anticipated in the previous forecast.

As for inflation, it will continue to decline in the eurozone to 5.6 percent in 2023, and to 2.9 percent in 2024. These figures are still far from the two percent target set by the European Central Bank (ECB), which has already raised interest rates nine times since July 2022 in a bid to reduce inflationary pressures.

In this regard, the commission's experts point out that "monetary tightening may weigh more heavily on economic activity than expected, but could also lead to a faster decline in inflation, which would accelerate the recovery of real incomes".

In the summer and winter forecasts, the commission also analyses the growth of the six largest economies of the bloc: France, Germany, Italy, Spain, the Netherlands, and Poland. EU economies have been affected differently by the coronavirus shock and the disruptions of the war in Ukraine.

"Inflation is declining, but at differing speeds across the EU," EU economy commissioner Paolo Gentiloni said. "And Russia's brutal war against Ukraine continues to cause not only human suffering but economic disruption."

While the growth estimates for Spain are promising, those for Germany are less so. The commission expects the Spanish economy to grow by 2.2 percent in 2023, while the German economy will shrink by 0.4 percent.

"Real wage losses continued to weigh on private consumption during the first half of 2023," reads the macroeconomic forecast for Germany. "Additionally, weak dynamics in external demand led to subdued exports".

Only the French and the Spanish economies have seen an upward revision of their growth. The French economy will grow by one percentage point, the Italian economy by 0.9% and the Dutch and Polish economies by half a percentage point.

The commission will publish its next fall forecast in November 2023. Climate risks will also weigh on the outlook, following the hottest summer on record, according to the European agency Copernicus.

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