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Inflation in the euro zone is expected to fall more rapidly this year than previously expected, after the impact of the Red Sea trade disruption turned out to be weaker than expected, according to the latest EU estimates.
The European Commission said on Wednesday that the single currency area's annual inflation rate is expected to fall to 2.5% this year, reaching the European Central Bank's target of 2% in the second half of 2025.
In its previous forecast in February, the committee predicted a more gradual decline of 2.7% in 2024 and 2.2% next year.
The commission still expects the single currency area to grow by 0.8% this year, but expects the European Union to grow at a slightly stronger 1% in 2024, 0.1% more than previously expected. There is. Last year's growth rate was 0.4% in both areas.
“We believe we have turned a corner,” EU Economic Commissioner Paolo Gentiloni said. “We expect growth to accelerate this year and further accelerate in 2025. Meanwhile, inflation will fall further and reach the ECB's target next year.”
In its spring outlook, the commission said inflation fell faster than expected due to lower commodity prices, mainly because the impact on Red Sea trade disruption was “less severe than feared.” Stated.
The eurozone economy showed tentative signs of recovery in the first three months of this year, with gross domestic product (GDP) increasing by 0.3% from the previous quarter.
This was driven by increased exports, increased tourism, and increased consumer spending due to lower inflation.
Economic growth is expected to continue increasing this year and next, especially as the European Central Bank is widely expected to start cutting interest rates next month. Wages are expected to continue rising, increasing household purchasing power, while inflation is expected to fall further.
But Europe's economy has been slower to recover from the pandemic than other regions, and was hit even harder by the fallout from Russia's invasion of Ukraine. Growth in the region is expected to remain weak compared to the United States and China.
Mr Gentiloni warned that the growth rate increase was “very modest” and exposed to downside risks related to the “uncertain and dangerous” geopolitical environment.
Many European countries continue to face declining productivity (output per hour worked), low levels of investment, high energy costs, an aging population, a shrinking workforce and fewer working hours. There is.
Germany's economy shrank by 0.3% last year, but is expected to grow by 0.1% this year. The other nine EU countries that contracted in 2023 are expected to return to positive territory.
Growth for the EU as a whole, including non-euro countries, is expected to be 1% this year, 0.1% more than previously expected. Growth in the region is expected to reach 1.6% next year.
Fiscal policy is also weighing on Europe's growth, as many governments across the region cut spending in response to the reintroduction of EU fiscal rules that limit budget deficits and debt.
“Europe is not just doom and gloom. Recovery is on the way,” Alfred Comer, the IMF's European director, said this week. “However, there are challenges and there is no room for complacency,” he said, adding that growth in the euro area would continue to be “inadequate”.
The IMF calls on Europe to remove internal trade barriers and deepen capital market integration to increase financing for high-growth companies, as well as investments in green energy, defense and digitalisation. .
ECB board member Isabel Schnabel said at an event in Berlin that the eurozone's “increasingly poor ability” to generate growth was hampering its international competitiveness.
“There is a clear gap in real IT-related capital stock between the euro area and the United States,” he said.
