The economy of the Eurozone and the EU continues to grow at a reduced pace, according to the summer economic forecasts of the European Commission published today.

In its summer interim economic forecast, the Commission revises down growth in the euro area and the EU, compared to its spring forecast published in May. In particular, growth of the eurozone economy is predicted at 0.8% in 2023 (from 1.1% predicted in the spring forecasts) and 1.3% in 2024 (from 1.6%). For the EU, growth is forecast at 0.8% in 2023 (from 1%) and 1.4% in 2024 (from 1.7%).

Inflation is expected to continue to decline over the forecast horizon.

In the eurozone, inflation is forecast to be 5.6% in 2023 (vs. 5.8%) and 2.9% in 2024 (vs. 2.8%).

In the EU, harmonized index of consumer prices (HICP) inflation is now forecast to reach 6.5% in 2023 (vs. 6.7% in spring) and 3.2% in 2024 (vs. 3.1%) in the EU .

The European Commission today publishes economic forecasts for only the six largest EU economies (Germany, Spain, France, Italy, the Netherlands and Poland). Among these countries, Spain is projected to record the highest economic growth, with 2.2% in 2023 and 1.9% in 2024.

However, for the EU’s largest economy, Germany, an economic recession of -0.4% is forecast in 2023 and growth of 1.1% is forecast in 2024. Inflation in Germany is forecast to reach 6.4% in 2023 and decrease to 2.8% in 2024.

For France, growth is forecast at 1% in 2023 and 1.2% in 2024. Inflation in France is expected to reach 5.6% in 2023 and decrease to 2.7% in 2024.

For Italy, growth is forecast at 0.9% in 2023 and 0.8% in 2024, while inflation is expected to reach 5.9% in 2023 and decrease to 2.9% in 2023.

Reduced growth potential

According to the Commission, the latest data confirms that economic activity in the EU was subdued in the first half of 2023 due to the severe shocks the EU has suffered. The weakness of domestic demand, especially consumption, shows that high and still rising prices consumer spending on most goods and services weighed more than expected in the spring forecasts. This is despite declining energy prices and an extremely strong labor market, which has seen record low unemployment rates, continued employment expansion and rising wages.

Meanwhile, the sharp slowdown in bank lending to the economy shows that monetary policy tightening is working in the economy. Survey indicators now point to a slowdown in economic activity over the summer and the coming months, with continued weakness in industry and weakening momentum in services, despite a strong tourist season in many parts of Europe.

The global economy fared somewhat better than expected in the first half of the year, despite a weak performance in China. However, the outlook for global growth and trade remains broadly unchanged compared to spring, suggesting that the EU economy cannot rely on strong support from external demand.

Overall, the weaker growth momentum in the EU is expected to extend to 2024 and the impact of tight monetary policy is expected to continue to constrain economic activity. However, growth is forecast to pick up modestly next year as inflation continues to ease, the labor market remains robust and real incomes gradually recover.

Inflation is falling

Inflation continued to moderate in the first half of 2023 as a result of lower energy prices and the containment of inflationary pressures from food and manufactured goods. In the euro area, it reached 5.3% in July, exactly half of the peak of 10.6% recorded in October 2022 and was flat in August.

Energy prices are expected to continue to decline for the rest of 2023, but at a slow pace. They are expected to increase slightly again in 2024 due to higher oil prices. Inflation in services has so far been more persistent than previously expected, but is set to moderate further as demand eases under the impact of monetary policy tightening and waning post-COVID-19 momentum. Food and non-energy industrial goods prices will continue to contribute to easing inflation over the forecast horizon, also reflecting lower input prices and the normalization of supply chains.

Risks and uncertainties

Russia’s ongoing war of aggression against Ukraine and broader geopolitical tensions continue to pose risks and remain a source of uncertainty. Moreover, monetary tightening may weigh on economic activity more than expected, but it could also lead to a faster decline in inflation that would accelerate the recovery of real incomes. Conversely, price pressures could prove more persistent.

“Increasing climate risks, illustrated by extreme weather conditions and unprecedented summer forest fires and floods, also affect the outlook,” the Commission stresses.