EU economy set to avoid recession; headwinds remain strong

This compares with the Autumn projections of 7 per cent in 2023 and 3 per cent in 2024.

EU gross domestic product (GDP) growth for 2022 is now estimated at 3.5 per cent, 0.3 percentage points higher than projected in Autumn, he said.

“Overall, the growth forecast for 2023 has been revised up to 0.8 per cent in the EU and 0.9 per cent in the euro area. For 2024, GDP growth is expected at 1.6 per cent in the EU and 1.5 per cent in the euro area, unchanged compared to the Autumn Forecast,” Gentiloni told a press conference on the Winter 2023 Economic Forecast.

Following robust expansion in the first half of 2022, growth momentum abated in the third quarter, although slightly less than expected. Despite exceptional adverse shocks, the EU economy avoided the fourth-quarter contraction projected in the Autumn Forecast.

Continued diversification of supply sources and a sharp drop in consumption have left gas storage levels above the seasonal average of past years, and wholesale gas prices have fallen well below pre-war levels.

In addition, the EU labour market has continued to perform strongly, with the unemployment rate remaining at its all-time low of 6.1 per cent until the end of 2022. Confidence is improving and January surveys suggest that economic activity is also set to avoid a contraction in the first quarter of 2023.

Headwinds, however, remain strong. Consumers and businesses continue to face high energy costs and core inflation (headline inflation excluding energy and unprocessed food) was still rising in January, further eroding households' purchasing power.

As inflationary pressures persist, monetary tightening is set to continue, weighing on business activity and exerting a drag on investment, the EU said in a release.

While uncertainty surrounding the forecast remains high, risks to growth are broadly balanced, the EU noted. Domestic demand could turn out higher than projected if the recent declines in wholesale gas prices pass through to consumer prices more strongly and consumption proves more resilient.

Nonetheless, a potential reversal of that fall cannot be ruled out in the context of continued geopolitical tensions. External demand could also turn out to be more robust following China's re-opening – which could, however, fuel global inflation, the bloc added.

Fibre2Fashion News Desk (DS)