EU Commission cuts euro zone growth forecast as Germany in recession

By Jan Strupczewski

BRUSSELS (Reuters) – The euro zone economy will grow slower than previously expected this year and next, the European Commission forecast on Monday as consumer demand suffers from high inflation and the biggest economy, Germany, slips into recession this year.

In its interim forecasts for gross domestic product and inflation of the euro zone’s five biggest economies, the Commission said the single currency area’s GDP (gross domestic product) would expand 0.8% in 2023 and 1.3% in 2024, against forecasts of 1.1% and 1.6% respectively made in May.

“Weakness in domestic demand, in particular consumption, shows that high and still increasing consumer prices for most goods and services are taking a heavier toll than expected in the spring forecast,” the Commission said.

“This is despite declining energy prices and an exceptionally strong labour market, which has seen record low unemployment rates, continued expansion of employment, and rising wages,” it said.

The Commission forecast euro zone consumer inflation of 5.6% in 2023 and 2.9% in 2024, both well above the European Central Bank’s target of 2.0%. Inflation this year is to be lower than the 5.8% forecast in May, but higher than previously forecast in 2024, as the May forecast was for 2.8%.

The ECB has been rapidly raising rates since the middle of 2022 to stem record price growth, making credit for the economy more expensive – a factor that hit the growth forecast.

“The sharp slowdown in the provision of bank credit to the economy shows that monetary policy tightening is working its way through the economy,” the Commission said.

“Survey indicators now point to slowing economic activity in the summer and the months ahead, with continued weakness in industry and fading momentum in services, despite a strong tourism season in many parts of Europe,” it said.

Germany, Europe’s biggest economy, will shrink 0.4% this year, the Commission forecast, revising down a 0.2% growth prediction from May. Next year, German growth will also be slower at 1.1% instead of the earlier expected 1.4.

Italy and the Netherlands will also grow more slowly this year, the Commission said, forecasting a GDP expansion of 0.9% and 0.5% respectively, down from 1.2% and 1.8% respectively.

But France and Spain will grow faster than previously expected in 2023 , the Commission said, projecting 1.0% and 2.2% growth respectively instead of the previously seen 0.7% and 1.9%.

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