EU downgrades growth forecast and raises inflation expectations

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The EU economy will grow by just 0.8% this year and 1.4% in 2024, according to data from the European Commission, which lowered growth forecasts and pointed to persistent inflation.

Monday’s data marked a downward revision from Brussels’ forecast in May of economic growth of 1% this year and 1.7% in 2024, as high prices and a shrinking German economy hit consumer spending across the bloc.

“The EU economy has lost momentum since the spring,” EU Economic Commissioner Paolo Gentiloni said. “Economic activity stalled in the second quarter and survey indicators point to further weakness in the coming months.”

The growth correction comes as the European Central Bank prepares for a key decision on Thursday on whether to raise interest rates to curb high inflation in Europe or keep them on hold to prevent a worsening recession.

The committee added that inflation would fall to 6.5% this year, down from its previous forecast of 6.7%. But it warned that inflation would remain at 3.2% in 2024, 0.1 percentage points higher than previously expected.

Line chart of GDP (quarterly percentage change since the fourth quarter of 2019) shows that Europe's economy has lagged behind the U.S. since the start of the pandemic

Europe’s economic outlook has softened in recent months due to sluggish manufacturing, sluggish trade with China, reduced government support measures and high inflation and rising borrowing costs that have squeezed consumer spending.

“Consumer prices for most goods and services remain high and rising, resulting in greater losses than previously anticipated,” the committee said.

The new data predicts that German real GDP will contract by 0.4%, compared with the previous forecast of 0.2% growth. The German economy will still grow by 1.1% in 2024, but the growth rate is lower than expected in Brussels’ spring forecast.

Italy’s economic growth rates in 2023 and 2024 have also been reduced by 0.3 percentage points, resulting in annual increases of 0.9% and 0.8% respectively.

The euro zone’s official second-quarter growth data was revised down to 0.1% from 0.3%, highlighting the region’s deteriorating economic outlook and increasing expectations that the European Central Bank will pause on raising interest rates on Thursday.

However, concerns about euro zone inflation remain, and although euro zone inflation has halved from a record high of 10.6% in October last year to 5.3% in August, it is still well above the European Central Bank’s 2% target.

Upward pressure on inflation comes from rising oil prices and a weak euro pushing up import costs, meaning the European Central Bank is still likely to raise interest rates again.

The European Commission added that the outlook for global growth and trade was largely unchanged, meaning the EU cannot rely on demand from other countries to support its economy.

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