Every year, the European Commission publishes two comprehensive (spring and autumn) and two interim (winter and summer) forecasts. The two comprehensive forecasts cover a wide range of economic indicators for all EU Member States, candidate countries, EFTA countries and other major advanced and emerging market economies. The current forecast takes into account information received up to 31 October 2023.
On this basis, the European Commission sees the European economy losing momentum this year due to high living costs, weak external demand and monetary tightening. Although economic activity is expected to gradually recover in the future, the European Commission’s autumn forecast revises EU GDP growth downwards compared to the summer forecast. Inflation is estimated to have fallen to a two-year low in the euro area in October and to continue to fall over the forecast period. However, the slowdown in the pace of consumer price inflation should improve consumer sentiment, which could bring economic growth back to the region. In fact, inflation is still on a downward trend. It is estimated to have fallen to 2.9% in the euro area in October from a peak of 10.6% a year ago. This is the lowest level since July 2021.
While the moderation in consumer prices over the past year has been driven mainly by a sharp fall in energy prices, it has now become more broad-based across all major consumption categories, beyond energy and food prices. As monetary tightening runs through the economy, inflation is expected to fall further, albeit at a more moderate pace, reflecting a slower but broader easing of inflationary pressures in food, manufactured goods and services, according to the European Commission. Overall inflation in the euro area is forecast to fall from 5.6% in 2023 to 3.2% in 2024 and 2.2% in 2025.
Surprisingly, the EU labour market continued to perform strongly in the first half of 2023 despite the slowdown in economic growth. In the second quarter, activity and employment rates in the EU reached their highest levels ever, and in September the unemployment rate remained at 6% of the labour force, close to a record low.
Other good news is that the phasing out of the temporary measures related to the pandemic, the reduction in support for private investment and the smaller net budgetary impact of energy-related measures are expected to offset the pressure on the fiscal balance from a less favourable economic environment and higher interest expenditure. As a result, the EU general government deficit is projected to narrow slightly to 3.2% of GDP in 2023.
The positive economic outlook is strongly influenced by the uncertain geopolitical situation, which has increased downside risks in recent months. Russia’s protracted war of aggression against Ukraine and the conflict in the Middle East have played a key role in this. The latter’s impact on energy markets has so far been contained, but there is a risk of disruptions to energy supplies, with potentially significant implications for energy prices, global output and overall price levels.
There are also geopolitical challenges and risks posed by the economic actions of the EU’s main trading partners, in particular China, and finally, extreme weather events such as heat waves, fires, droughts and floods, which are becoming more frequent and more intense on the continent and beyond, illustrate the dramatic consequences that climate change could have not only for the environment and the people affected, but also for the economy.
