A steep drop in German output will help drag the EU into recession this winter, as higher inflation and the Ukraine war take a heavy toll on the bloc’s economy, the European Commission has predicted.
Output across the union will contract in the current quarter and the first three months of 2023, with Germany suffering one of the biggest falls in activity as surging energy costs curtail household spending power and force factories to curb production.
Inflation in the EU will be higher than the commission forecast in the summer, running at 7 per cent over the course of 2023, down only modestly from this year’s expected 9.3 per cent.
The predictions add up to a grim period for the EU’s economy, which had bounced back following the worst of the pandemic before the Russian invasion of Ukraine and ensuing energy price crisis. Germany, the union’s largest economy, has been particularly hard-hit because of the importance of its energy-intensive industry.
“The shocks unleashed by Russia’s war of aggression against Ukraine are denting global demand and reinforcing global inflationary pressures,” the commission said. “The EU is among the most exposed advanced economies, due to its geographical proximity to the war and heavy reliance on gas imports from Russia.”
Output growth in the 27-member EU will decelerate to just 0.3 per cent in 2023, far below a prior forecast of 1.5 per cent published this summer, the commission projections showed. Germany is on course for a 0.6 per cent full-year decline in real gross domestic product in 2023, according to the outlook, the worst performance in the euro area.
While EU output growth is predicted to remain positive over the current year, at 3.3 per cent, the economy will begin contracting in the final three months of the year, shrinking 0.5 per cent, before declining by a further 0.1 per cent during the first quarter of 2023.
Nevertheless, rapid price growth will probably leave the European Central Bank on course for further monetary tightening with a further rate rise to at least 2 per cent predicted at its next meeting in December.
The commission raised its forecast for eurozone inflation to 8.5 per cent this year, 6.1 per cent next year and 2.6 per cent in 2024, according to the figures. That compares with its July forecast for inflation in the bloc to fall from 7.6 per cent this year to 4 per cent next year.
The ECB is due to publish its own forecasts next month, which will play a significant role in determining the pace and extent of future interest rate rises. The central bank has already lifted its deposit rate from minus 0.5 per cent to 1.5 per cent since July.
Investors will be watching for signs that inflation could soon peak in the eurozone, after consumer prices slowed in the US in October, according to data released on Thursday. This prompted a surge in equity and bond markets as markets bet the US Federal Reserve would stop raising rates earlier than previously expected.
Several senior ECB policymakers have said in recent days that a mild recession will not be enough to bring inflation back to its 2 per cent target on its own and therefore it will need to raise rates above the point at which it restricts growth and inflicts pain on the labour market.
“There’s no time for monetary policy to pause,” said Isabel Schnabel, an ECB executive board member, on Thursday. “We will need to raise rates further, probably into restrictive territory, to bring inflation back to our medium-term target in a timely manner.”
The commission expects the economy to gain some traction by 2024, expanding by 1.6 per cent in the EU and 1.5 per cent in the euro area. But it warned the outlook was surrounded by an “exceptional degree of uncertainty” because of the war, with the biggest threat stemming from the risk of energy shortages in the winter of 2023-24.
“The EU economy has shown great resilience to the shockwaves this has caused,” said Paolo Gentiloni, economics commissioner. “Yet soaring energy prices and rampant inflation are now taking their toll and we face a very challenging period both socially and economically.”
Source: Economy - ft.com
