The EU is predicted to narrowly avoid recession as a result of a milder-than-expected energy shock, although households face difficult times ahead as cost of living pressures ease only gradually, the European Commission has said.
Economic growth for the 27 countries of the EU is forecast to be 0.8% in 2023, compared with a 0.3% projection last autumn, when fears of winter power outages and the rising cost of living ran high. In the 20-country eurozone, the economy will expand by 0.9% in 2023, boosted by a better-than-expected performance in Germany and Italy, as well as relatively stronger growth in Spain.
The rapidly declining price of gas means inflation has now peaked, with the headline rate forecast to fall from 9.2% in 2022 to 6.4% in 2023, then 2.8% in 2024.
“The EU economy entered 2023 on a healthier footing than expected and looks set to escape recession,” the EU economy commissioner, Paolo Gentiloni, told reporters. He warned, however, that inflation in 2023 would remain stubbornly high, putting pressure on households. “Europeans still face a difficult period ahead, with growth still expected to slow and inflation set to relinquish its grip on purchasing power only gradually.”
The commission estimates that in 2022 the EU experienced economic growth of 3.5%, a better rate than either China or the US. The UK, by contrast, expanded by 4.1% in 2022 but is forecast by the International Monetary Fund to be the only economy to shrink in 2023 among major industrialised countries.
Despite a better-than-expected start to the year for the EU, growth will slow compared with 2022, as wages lag behind prices, meaning consumers are likely to be cautious about spending money.
The EU is now expected to avoid recession, as a result of falling gas prices. The European gas benchmark, the Dutch TTF, was trading at €55 (£49) a megawatt hour in late January, below its pre-Russia-Ukraine war level. The EU has so far overshot its plan to reduce gas consumption, and managed to keep gas storage levels high throughout the winter, helped by milder weather. According to the commission, gas consumption in October and November 2022 was 25% below the 2017-21 average, compared with a 15% reduction target.
Despite success in weaning itself off Russian gas, Germany is forecast to experience a mild economic decline in early 2023. EU officials attribute this to increasing energy prices, combined with government support for January and February not being disbursed in March. Germany’s large export-oriented economy will also be hindered by weak foreign demand.
Overall, the commission is forecasting 0.2% growth for Germany in 2023, one of the weaker performances in the EU, although better than the 0.6% contraction forecast three months ago.
France will also be below the EU average, with moderate economic growth of 0.6% forecast for 2023. In the EU’s second-largest economy, economic activity is expected to remain subdued over the first half of 2023, with a gradual recovery from the summer, as cost of living pressures begin to ease.
Meanwhile, Italy is expected to experience a 0.8% expansion in its economy this year, after a small decline at the end of 2022. Italian household spending and investment is expected to pick up in the second half of the year, as cost of living pressures ease and the economy begins to benefit from Italy’s €192bn EU-backed Covid recovery plan.
Spain is expected to chalk up economic expansion of 1.4%, helped by a strong performance in 2022 when the country was boosted by high demand from tourists seeking post-Covid foreign travel. The continuing strength of Spain’s tourism sector, as well as a boost in construction and equipment spending from its €69.5bn Covid recovery plan, are expected to support the Spanish economy in 2023.
The UK was last week shown to have narrowly avoided a recession, with zero growth in the final quarter of 2022. The Bank of England has predicted a shallow recession for the UK economy in 2023, as it warned that Brexit was damaging the economy more quickly than it had anticipated.
Gentiloni said the main risks to the commission’s forecasts were geopolitical tensions and the evolution of Russia’s war in Ukraine, which left investors and companies facing “a high degree of uncertainty”.
