Brussels (AFP) – The European Commission on Thursday cut both its 2024 growth and inflation forecasts for the euro zone, warning that geopolitical tensions will increase uncertainty for the single currency bloc's economy.
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Forecasts by the EU's executive branch show the impact of the European Central Bank's interest rate hike campaign last year. The drop in inflation is welcome, expected to fall to 2.7%, but at the same time there is also worryingly low growth, expected to reach just 0.8%.
The Frankfurt-based ECB has kept interest rates on hold so far in 2024, but is widely expected to start cutting rates later this year in the face of weak consumer prices and a weakening euro zone economy.
Inflation soared in the aftermath of Russia's 2022 invasion of Ukraine, and energy prices soared as Europe scrambled to find alternative power sources.
The Committee revised its inflation outlook significantly downward from 3.2% to reflect lower energy prices, but it remains above the ECB's 2% target.
“Falling energy commodity prices, weakening economic momentum and recent inflation trends mean inflation is on a lower downward trajectory than expected last autumn,” EU Economic Commissioner Paolo Gentiloni told reporters in Brussels. “There is,” he said.
The committee's 2024 growth forecast for the 20-nation eurozone is 0.8%, a significant downward revision from the previous forecast of 1.2%.
“Despite narrowly avoiding a technical recession in the second half of last year, the outlook for the EU economy in the first quarter of 2024 remains weak,” the report said.
However, Gentiloni tempered the gloomy outlook by stressing that “the conditions are still in place for a modest acceleration in economic activity this year.”
The city of Brussels expects growth to reach 1.5% next year, and Gentiloni said the factors likely to support growth include “a solid labor market, easing inflation, rising wages and expected “Gradual easing of credit conditions.”
EU “poor performance”
But for now, EU officials believe the eurozone is underperforming compared to the rest of the world. Last year, the US full-year economic growth accelerated to 2.5%.
Gentiloni said that's because U.S. consumers have benefited from larger pandemic stimulus packages than Europe, which has also been hit harder by the impact of the Ukraine war on energy prices. he added.
“The EU underperformed the US in 2023 and will do the same this year,” he said.
Gentiloni also said that a “surprise in China's economic growth” and “a prolonged period of US policy interest rates could worsen global financial conditions.”
European Commission Vice-President Valdis Dombrovskis warned that “the global situation remains very uncertain” due to concerns that the conflict in the Middle East could spread beyond Israel and Gaza.
“We are closely tracking geopolitical tensions that could have a negative impact on growth and inflation,” he said in a statement.
However, the committee was optimistic that despite the expiration of energy support packages and trade disruptions in the Red Sea, these issues would not hinder inflation from falling in the long run.
“We expect inflation to continue rising moderately and fall to just above 2% by the end of 2025,” Gentiloni said.
German economic downturn
The eurozone weighs heavily on Germany, the region's largest economy.
The committee significantly cut its outlook for Germany, expecting growth to be just 0.3% in 2024, down from its autumn forecast of 0.8%.
Gentiloni said of Germany's woes: “Private consumption suffered from a decline in purchasing power. Activity in the construction and energy-intensive sectors was constrained by significantly higher costs and labor shortages.”
However, the committee still expects the German economy to grow by 1.2% in 2025.
France, the EU's second-largest economy, is faring better than Germany, but the European Commission also cut its growth forecast from 1.2% to 0.9%.
It also slightly revised down its outlook for the French economy in 2025, now forecasting growth of 1.3%, up from the 1.4% expected in the fall.
© 2024 AFP
