On Thursday, the European Commission reduced forecasts for both economic growth and inflation in the European Union, warning that geopolitical risks such as the war in Ukraine and tensions in the Middle East continue to overshadow the economy.
"Economic activity in the EU was extremely limited throughout 2023 and did not meet our earlier predictions," Economic Commissioner Paolo Gentiloni informed journalists on Thursday.
The latest growth forecasts by the EU's executive body are more subdued than those released in the autumn. However, the Commission expects inflation, which rose during the COVID-19 lockdown and the Russian war in Ukraine, to return to a more acceptable level. The Commission estimates that the EU's gross domestic product (GDP) increased by 0.5% in 2023 and is expected to rise by 0.9% in 2024, whereas growth of 0.6% and 1.3% respectively had been forecasted earlier. The final prediction that GDP should increase by 1.7% in 2025 remains unchanged.
The Commission forecasts that the GDP of the 20 countries in the eurozone increased by 0.5% in 2023 and is expected to grow by 0.8% and 1.5% in 2024 and 2025, respectively.
Growth in 2023 was "hampered by decreased household purchasing power," high interest rates, and declining export demand, according to the commission's press release.
"After barely avoiding a technical recession in the second half of last year, the economic forecasts for the EU in the first quarter of 2024 are still poor," although the commission expects growth to accelerate by 2025.
It is forecasted that Germany's GDP contracted by 0.3% in 2023 and is expected to grow by only 0.3% in 2024.
Ireland's GDP decreased by 1.9% in 2023, but is expected to grow by 1.2% in 2024 and 3.2% in 2025, significantly more than the EU average.
All Baltic countries – Latvia, Lithuania, and Estonia – experienced a recession in 2023. Among all EU countries, Estonia's economy was the most severely affected last year, with its GDP decreasing by 3.5%.
A recession in 2023 was also observed in Luxembourg, Austria, Finland, the Czech Republic, Hungary, and Sweden.
The Commission predicts that there will be no recession in any member state in either 2024 or 2025. The weakest growth – merely 0.2% – is forecasted for Sweden in 2024.
The EU's executive body predicts that this year, the economies of Malta (4.6%), Romania (2.9%), Cyprus (2.8%), and Poland (2.7%) will grow the fastest.
Meanwhile, inflation is retreating faster than expected.
"The average inflation rate of 3.5% previously forecasted for this year in the EU has been reduced to 3% in today's forecasts," said Gentiloni. "We are forecasting 2.2% for 2025, unchanged from autumn. And in the eurozone, we believe the average inflation this year should be 2.7%, and 2.2% for 2025."
Gentiloni stated that the reduced inflation is raising market participants' expectations that the European Central Bank will lower the increased interest rates in the eurozone "sooner and more than anticipated."
However, "in Central and Eastern Europe, mainly in non-eurozone countries, inflation is still expected to remain high," said Gentiloni.
In 2023, the highest inflation in the EU was recorded in Hungary – 17%. It is projected to decrease to 4.5% in 2024. This year, the highest inflation is expected in Romania (5.8%), and in 2025 in Poland (4.7%).
The decrease in inflation is primarily due to falling energy prices, the commission pointed out.
On Wednesday, it reported that energy prices surged in 2022–2023 following the onset of Russia's invasion of Ukraine.
The commission's competitiveness report, released a day before the latest forecasts, stated that the average price per kilowatt-hour for medium-sized companies in the EU, which was 0.18 euros in 2022, rose to 0.21 euros in 2023.
However, Thursday's forecasts found that spot market energy prices at the end of 2023 were lower than expected. Prices finally dropped due to "increased supply (from gas and renewable sources, as well as water and nuclear energy) and improved infrastructure," according to the forecasts.
Yet, the ongoing war in Ukraine continues to impact the EU's economic outlook, Gentiloni noted.
While the US has better prospects for 2023–2024, "the EU felt a greater negative impact from the large-scale Russian invasion of Ukraine and the rise in energy prices because we are closer to the war zone and more dependent on energy imports," he explained.
The economy is also pressured by renewed violence in the Middle East this year, Gentiloni stated. "As ships from the Red Sea are rerouted, the delivery time between Asia and Europe has extended by 10–15 days, and the transportation cost has risen by approximately 400%."
