EU cuts eurozone 2023 growth forecast, sees German recession

The European Commission cut its 2023 and 2024 eurozone economic growth forecasts on Monday, with the single currency area weighed down by Germany's poor performance.

The EU's executive arm predicted the German economy would contract by 0.4 percent in 2023, compared to a previous forecast of 0.2 percent growth.

Germany faces recession in its vast industrial sector and a lacklustre performance in exports, both of which have significant impacts for the whole of the economy.

In its report, the commission pointed to manufacturing weakness and said Germany was "hit particularly hard" by energy price shocks linked to the war in Ukraine.

The European Central Bank's efforts to tame inflation via interest rate-hikes also contributed to the slowdown in the eurozone, the report added, days before the ECB meets to decided whether to raise borrowing costs again or pause its campaign.

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The International Monetary Fund had already predicted Germany would be the only major advanced economy to shrink in 2023.

Growth in the eurozone and the European Union as a whole will continue but will be lower than predicted earlier this year.

In May, the commission said the eurozone would grow by 1.1 percent in 2023 -- but revised that on Monday to 0.8 percent.

"While we avoided a recession last winter, the multiple headwinds facing the EU economy this year have led to somewhat weaker growth momentum than we projected in the spring," the economy commissioner, Paolo Gentiloni, said during a press conference.

The commission in its report said there would be "slowing economic activity in the summer and months ahead, with continued weakness in industry and fading momentum in services, despite a strong tourism season in many parts of Europe".

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Europe will also not be able to "count on strong support" from exports amid weak global growth and demand.

'Sick man' Germany?

Gentiloni, however, sounded an optimistic note for improvement in Germany's economy.

"The situation of domestic consumption, domestic demand, household purchasing power, could be improved in the coming months and this could bring the German economy back to a growth trajectory," he told reporters in Brussels.

But, he added, "the structural challenges on energy and other aspects are there. You don't solve this in a couple of weeks".

The gloomy German data prompted an Economist cover story in August that asked: "Is Germany once again the sick man of Europe?"

Asked whether he would agree with the "sick man" description, Gentiloni rejected using such titles in the EU's analysis.

"I don't think we can base our analysis on titles on the cover of newspapers," he said, adding: "Germany is a strong economy with the tools and possibility to recover."

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Stubborn inflation

The commission also pointed to repeated interest rate hikes by the ECB, which meets Thursday, as having an impact on the economy.

"The sharp slowdown in the provision of bank credit to the economy shows that monetary policy tightening is working its way through the economy," it said, thereby reducing individuals and businesses ability to invest.

The growth forecast for the 27-nation EU as a whole was also cut for 2023 to 0.8 percent, from an earlier prediction of around one percent.

The single currency area made up of 20 countries will grow by 1.3 percent in 2024, the commission said, down from a previous forecast of 1.6 percent.

EU growth will be sightly better at 1.4 percent next year.

The eurozone inflation forecast has also been revised down, forecast to remain well over target at 5.6 percent in 2023 compared to 5.8 percent in the previous outlook.

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The ECB's official inflation target is two percent.

Consumer prices in the eurozone are expected to drop back to 2.9 percent in 2024, a slight increase from a 2.8 percent prediction made in May for next year.

Source: AFP