Amended: Eurozone Set To Escape Recession; Inflation Outlook Downgraded

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Following the favorable development in energy prices and the diversification of supply sources, the euro area is set to avoid a recession and gradually pick up pace next year, as inflation likely peaked and has loosened its grip on economic activity, the European Commission said in its interim forecast, released Monday.

In the Winter Interim Forecast, the commission raised its economic growth outlook for the currency bloc to 0.9 percent from 0.3 percent. At the same time, the economy is expected to advance 1.5 percent in 2024, unchanged from the Autumn forecast.

The commission observed that the milder than expected slowdown in growth momentum in the second half of the last year translated into a better starting point for this year.

Inflation outlook for this year was lowered to 5.6 percent from 6.1 percent. At the same time, inflation is set to end 2024 a notch above the target. The projection for next year was trimmed slightly to 2.5 percent from 2.6 percent.

However, the EU cautioned that the core inflation was trending up. Moreover, markets expect policy rates to peak by mid-year at a slightly higher level than expected in autumn, given a strong labor market in the face of rising core inflation.

“For inflation, the question is whether the recent decline in energy prices will continue, despite the assumed continued geopolitical tensions, and pressures on core inflation will abate,” the commission said.

The EU region is forecast to keep stagnating in the first quarter, but to pick up mildly in spring. Annual GDP growth for this year was projected at 0.8 percent in the EU. For 2024 as a whole, growth is expected at 1.6 percent.

Regarding the labor market, the EU said the outlook is set to remain tight in 2023 and 2024.

Germany’s real GDP is expected to increase slightly by 0.2 percent in 2023, representing an upward revision from the -0.6 percent projected in the Autumn Forecast. In 2024, growth is set to rebound to 1.3 percent, the commission said.

The French economy is projected to keep gaining traction until the end of 2024 as energy and food inflation moderate. In 2023, GDP is forecast to expand only moderately in annual terms, by 0.6 percent, but to grow 1.4 percent next year.

Driven by a higher-than-projected carry-over from 2022, Spain’s economic growth is set to hit 1.4 percent this year. Real GDP is forecast to increase 2.0 percent in 2024, underpinned by investment and private consumption.

Italy’s real growth is projected to pick up only gradually this year as household spending continued to be held back by high inflation. GDP is forecast to grow 0.8 percent this year and to reach 1.0 percent in 2024.

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