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EU economy loses momentum amid Ukraine war, inflation, natural disasters and higher interest rates

The European Commission's interim report projects the German economy will decrease this year at a -0.4% rate.
The European Commission's interim report projects the German economy will decrease this year at a -0.4% rate. Copyright Michael Probst/Copyright 2023 The AP. All rights reserved
Copyright Michael Probst/Copyright 2023 The AP. All rights reserved
By Jorge Liboreiro
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The European Commission has revised down its economic forecast, warning that stubbornly high prices for goods and services are "taking a heavier toll than expected."


The bloc's economy "continues to grow, albeit with reduced momentum," the European Commission said in an interim report published on Monday morning.

The European Union as a whole is now predicted to grow by a modest 0.8% this year, slightly down from the 1% projected in spring, and by 1.4% in 2024.

The eurozone will see similarly downgraded rates: 0.8% in 2023 (compared to 1.1% in the previous estimation) and 1.3% in 2024.

"The latest data confirms that the EU economy avoided recession last winter – this is no mean feat given the magnitude of the shocks we have faced," said Paolo Gentiloni, the European Commissioner for the economy, while presenting the new forecast.

"However, economic activity stalled in the second quarter and survey indicators point to further weakening in the coming months."

Germany, the bloc's industrial powerhouse, will experience a downturn of –0.4% this year, a troubling sign that is "affecting everyone," Gentiloni said. Poland, a neighbouring economy, will expand by just 0.5% in 2023 after posting a healthy 5.1% rate in 2022.

The report underlines the extent to which high prices have permeated all sectors of the economy, going well beyond energy, which was the initial driver behind last year's record-breaking inflation but has since then receded.

Inflation among the countries that use the single currency is expected to reach 5.6% in 2023 and 2.9% in 2024 – a figure still far from the 2% annual target that the European Central Bank (ECB) is trying to achieve by raising interest rates.

The bank will hold a new meeting on Thursday to decide what could be its tenth hike since July 2022.

The ever-tighter monetary conditions leave a "narrow path" for governments to craft their fiscal policies as public investments need to continue but without fuelling inflationary pressures, Gentiloni said.

"We openly recognise the fact that addressing inflation and the perspective of inflation could go in both directions," the Commissioner said.

Besides interest rates, the report speaks of weaker consumption, a slowdown in credit provisions and sluggish industrial output as causes for the loss of momentum, coupled with the uncertainty unleashed by Russia's war on Ukraine and the damage inflicted by natural disasters, such as the unprecedented floods and wildfires seen this summer.

Greece, Italy, Portugal and Slovenia are among the member states that have been hit by extreme weather in recent months, a devastation that comes with a hefty bill.

The frequency of natural disasters should prompt the European Commission to reassess the way in which it crafts its economic forecasts, Gentiloni said, so it could take into account the direct and indirect costs that arise from the reconstruction.

"We should address this more and more with resources and maybe also include them in our model of forecast. (It's) not easy, but in a certain sense, (it's) needed," he said.

In some good news, the EU's labour market remains "exceptionally strong," the report says, with an unemployment rate of 5.9% in June.

The rise in wages is expected to continue, although the gains have so far failed to outweigh inflation, meaning workers have lost some of their purchasing power.

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