Economy

Euro zone on course to dodge recession as energy crunch eases

Officials forecast economy to expand 0.9 per cent this year

European Commissioner in charge Economy Paolo Gentiloni speaks after the Commission announced that the EU economy is set to avoid recession, but headwinds persist.

Mon Feb 13 2023 - 09:54

The euro-zone economy will fare better this year than previously feared as a mild winter and high levels of gas storage help to ease the energy crisis, and the labor market holds up, according to the European Commission.

European Union officials in Brussels raised their forecast for growth this year, predicting a 0.9 per cent expansion in the currency bloc, and said it would narrowly avoid a recession. They also cut their projection for consumer price growth, though it remains high at 5.6 per cent.

“Almost one year after Russia launched its war of aggression against Ukraine, the EU economy is on a better footing than expected in autumn,” the commission said Monday in its updated economic report. “Inflation appears to have peaked and favorable developments in energy markets foreshadow further forceful declines.”

The increased optimism contrasts with forecasts given in November, when officials predicted gross domestic product would grow just 0.3 per cent this year in the euro zone and inflation would be at 6.1 per cent.

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The new projections will be closely watched by Europe’s governments as they try to wean households and businesses off massive aid to tackle the energy crisis and shift to more targeted support. They will also provide insight to central bankers, who have embarked on a series of rate hikes in an effort to bring soaring inflation back under control.

The latest commission forecasts show that all EU member states will achieve growth this year, with the exception of Sweden, which is expected to contract by 0.8 per cent.

Germany, the region’s biggest economy, and Austria are the only two euro-area countries seen having two consecutive quarters of contraction in the six months through March 31. Estonia’s output decreased in the last three quarters of 2022 but is seen growing in the current period.

Italy’s economy is predicted to stagnate in the first three months of 2023 after a slight contraction in the fourth quarter, according to the commission’s forecasts.

Outside the euro zone, the Czech Republic and Hungary have already ended two quarters of contraction, while Denmark and Sweden are currently in recession.

The commission cautioned that while the outlook has improved, headwinds remain strong as Russia pursues its war in Ukraine.

“Consumers and businesses continue to face high energy costs, and core inflation — headline inflation excluding energy and unprocessed food — was still rising in January, further eroding households’ purchasing power,” it said. “As inflationary pressures persist, monetary tightening is set to continue, weighing on business activity and exerting a drag on investment.”

Data from Eurostat at the end of January already suggested the euro area was on course to avoid a recession after unexpectedly growing by 0.1 per cent at the end of 2022. Inflation in the 20-member currency bloc slowed more than expected in January to 8.5 per cent, according to Eurostat, though a gauge of underlying inflation that excludes volatile items held at an all-time high of 5.2 per cent.

The European Central Bank lifted the deposit rate by a half-point to 2.5 per cent on Feb. 2, the highest since 2008, and said it intended to make an identical step next month. President Christine Lagarde called risks to the growth and inflation outlook more balanced, touting the continent’s unexpected resilience.-- Bloomberg

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