Good news and bad news. The European Commission significantly lowered its inflation and growth forecasts for the euro zone this year on Thursday, highlighting the impact of interest rate hikes on the economy and prices. Inflation in the 20 countries sharing the single currency is expected to reach 2.7% in 2024, according to the European executive. Last fall, he was still counting on 3.2%. The counterpart of this success is growth which is much less good than expected. The Commission is now counting on 0.8% this year, while it was still expecting 1.2% in the fall.
After a weak start to the year, “the expected rebound in 2024 should be more modest than expected three months ago, but gradually accelerate thanks to the slowdown in price increases, the increase in real wages and the remarkable strength of the labor market,” declared European Commissioner for the Economy Paolo Gentiloni. Growth is suffering from high interest rates imposed by the European Central Bank (ECB) to calm record inflation, in the wake of the war in Ukraine which sent energy prices skyrocketing.
This policy is showing results. The rise in consumer prices was limited to 2.8% in the euro zone in January, according to the European office Eurostat. It has been more than divided by three since the record of 10.6% reached in October 2022. But, at the same time, the euro zone came close to recession at the end of last year, recording zero growth in the last quarter, sliding quarterly, after a decline of 0.1% over the period July to September. Overall, the economy has been stagnating for almost a year and a half. The gross domestic product (GDP) of the euro zone only increased by 0.5% over the whole of 2023 compared to the previous year.
“The European economy leaves behind an extremely difficult year,” acknowledged Paolo Gentiloni. In addition to strong monetary tightening, growth was hampered last year by the erosion of household purchasing power and weaker budgetary support from governments keen to restore public finances. However, “the decline in prices of energy raw materials and the slowdown in economic dynamics have placed inflation on a more pronounced downward trajectory than expected,” the Commission explained in a press release.
Inflation should continue to fall next year to reach 2.2%, very close to the 2% target set by the ECB, Mr. Gentiloni stressed. At the same time, the Commission sees growth recovering to 1.5% in 2025. Financial markets anticipate a cut in interest rates from the ECB this year which could revitalize demand for credit and therefore consumption and investment. “However, the global landscape remains very uncertain,” warned Trade Commissioner Valdis Dombrovskis. “We are closely monitoring geopolitical tensions, which could have a negative impact on growth and inflation,” he warned.
These forecasts are “surrounded by uncertainty” linked in particular to the risk of extension of the conflict in the Middle East. Attacks on ships in the Red Sea are forcing shipowners to take longer routes to transport goods. Some fear a surge in oil and gas prices. “Increased shipping costs following trade disruptions in the Red Sea are expected to have only a marginal impact on inflation,” the Commission estimates. “However, further disruptions could lead to further supply bottlenecks, which could stifle production and drive up prices,” she warns.
European companies are also following with concern the evolution of the war in Ukraine which has led to the cessation of supplies of cheap Russian gas to the EU. The sharp rise in gas and electricity prices has already structurally weakened entire sectors of industry, such as chemicals and metallurgy.
