Eurozone Set for Weaker Growth as High Inflation, Interest Rates Bite, EU Says

By Joshua Kirby and Ed Frankl

The eurozone is likely to grow at a slower pace than previously expected due to cost-of-living pressure and weakness in global trade, with the conflict in the Middle East adding to uncertainty, according to fresh forecasts set out by the European Union's executive Wednesday.

The 20-member currency bloc is expected to grow at 0.6% in 2023 and 1.2% in 2024, revised down from previous estimates of 0.8% and 1.3% for each year respectively, the European Commission said in its autumn forecasts.

A combination of still-high inflation and tighter monetary supply, following a lengthy cycle of interest-rate increases lies behind the gloomier outlook, the commission said. The bloc's economy contracted 0.1% in the third quarter, data confirmed this week, as high rates continued to squeeze domestic consumption, while fading global demand squeezed exports.

Among the bloc's major economies, Germany is forecast to underperform, contracting this year by 0.3% before returning to growth in 2024, the forecasts say. Spain should book the highest growth of the eurozone's four-largest at 2.4% in 2023, before slowing next year.

The bloc's activity should nevertheless begin to recover gradually, with overall growth of 1.6% slated for 2025, the commission said.

"Economic activity is expected to gradually pick up as consumption recovers on the back of a steadily robust labour market, sustained wage growth and continued easing of inflation," it said.

Investment is projected to increase further, supported by solid corporate balance sheets and EU funds, it added.

Rising consumer prices, which have dragged spending power and led the European Central Bank to push up interest rates to historically high levels, should slow to an average increase of 3.2% next year, albeit higher than a previous estimate of 2.9%, according to the commission's forecasts.

Inflation has come down from last year's heights, when the escalation of the Russia-Ukraine conflict caused a spike in energy prices, and should ease to 2.2% by 2025, taking it close to the ECB's target of 2%, the commission said.

The ECB itself expects inflation at 5.6%, 3.2% and 2.1% in 2023, 2024 and 2025, respectively, according to forecasts it made in September.

"While the moderation in the past year was mainly driven by the sharp fall in energy prices, it has now become increasingly broad-based across all main consumption categories, beyond energy and food," the commission said.

The eurozone labor market should, meanwhile, remain resilient, according to the latest forecasts. Weakening economic activity has not been accompanied by a major spike in unemployment in the currency union, and the jobless rate is seen remaining around its current low level of 6.5% this year and next before falling even further to 6.3% in 2025, the commission said.

However, global turmoil could raise risks, the commission said. Heightened conflict in the Middle East has so far had limited impact on energy markets, but supplies could be hampered and impact prices, the commission said. Economic developments in major trading partners in China could be a further obstacle. Climate change, including extreme weather events like heatwaves, droughts, wildfires and storms, could also have dramatic consequences, it said.

The commission will set out its next set of forecasts in February next year.

Write to Joshua Kirby at [e-mail]; @joshualeokirby

(END) Dow Jones Newswires

11-15-23 0514ET