Germany’s economy will shrink this year as part of a wider eurozone slowdown triggered by higher inflation and the dampening impact of rising interest rates, the European Commission has said.
In its interim quarterly update, the commission said Europe’s powerhouse economy would be the worst-affected major country in the 20-nation single currency bloc and would record a 0.4% contraction in 2023.
Three months ago, the commission was forecasting that Germany would grow by 0.2% this year, but now it says the world’s fourth biggest economy has been even more sorely affected by weaker consumer spending than it had envisaged.
While the growth prospects of France and Spain have improved modestly since the spring, the commission said the eurozone economy overall was now expected to expand by 0.8% in 2023, down from 1.1% previously. Growth in 2024 has been revised down from 1.6% to 1.3%.
The downbeat economic forecasts increase the chances of the European Central Bank calling a halt to the steady tightening of policy that has resulted in its key interest rate rising from -0.5% to 3.75% in nine successive jumps.
Growth in the 27-country EU for 2023 has also been revised down, from 1% to 0.8%, while inflationary pressure across Europe has eased slightly.
“Latest data confirms that economic activity in the EU was subdued in the first half of 2023 on the back of the formidable shocks that the EU has endured,” the commission said. “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.
“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.”
The commission said the sharp slowdown in the provision of bank credit showed higher interest rates were working their way through the economy. Survey indicators pointed 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.
Inflation in the eurozone is expected to average 5.6% in 2023, compared with 5.8% in the spring. In the broader EU, inflation is forecast to be 6.5% rather than 6.7%.
Paolo Gentiloni, the EU commissioner for economy, said: “The EU avoided a recession last winter – no mean feat given the magnitude of the shocks that we have faced. This resilience, most evident in the strength of the labour market, is a testimony to the effectiveness of our common policy response.
“However, the multiple headwinds facing our economies this year have led to a weaker growth momentum than we projected in the spring. Inflation is declining, but at differing speeds across the EU. And Russia’s brutal war against Ukraine continues to cause not only human suffering but economic disruption.”
Gentiloni said “prudent, investment-friendly” tax and spending policies should work in tandem with the efforts of central banks to tame inflation.
