The European Commission on Thursday cut both its growth and inflation forecasts for the European Union, as it warned that geopolitical risks like the war in Ukraine and tensions in the Middle East still loomed over the economy.
"Economic activity in the EU was very subdued throughout '23, underperforming our previous forecast," Economy Commissioner Paolo Gentilioni told reporters on Thursday.
The EU executive's latest growth forecast is bleaker than the one it published in the autumn. However, the commission expects inflation — which soared amidst Covid-19 lockdowns and the escalation of Russia's war in Ukraine — to return to more manageable levels.
The commission estimates EU gross domestic product (GDP) grew 0.5% in 2023 and predicts 0.9% in 2024, downgrading its previous forecast of 0.6% and 1.3% respectively. It forecasts 1.7% in 2025, in line with its last prediction.
In the 20 countries using the euro, the commission expects 0.5% growth in 2023, 0.8% in 2024, and 1.5% in 2025.
Growth in 2023 was "held back by the erosion of household purchasing power," high interest rates and falling demand for exports, said a commission press release.
"After narrowly avoiding a technical recession in the second half of last year, prospects for the EU economy in the first quarter of 2024 remain weak," though the commission expects stronger growth in 2025.
The forecast estimates that German GDP shrank 0.3% in 2023 and will grow by just 0.3% in 2024.
Irish GDP contracted 1.9% in 2023, but is expected to grow by 1.2% in 2024 and 3.2% in 2025, well above the EU average.
The Baltic states of Latvia, Lithuania, and Estonia all suffered recessions in 2023. Estonia is the EU's worst-hit economy last year, with a 3.5% contraction in national GDP.
Luxembourg, Austria, Finland, the Czech Republic, Hungary and Sweden also had recessions in 2023.
The commission predicts no member state will experience recession in 2024 or 2025. Sweden is expected to see the weakest growth of 0.2% in 2024.
The EU executive expects the strongest growth this year to be seen in Malta (4.6%), Romania (2.9%), Cyprus (2.8%) and Poland (2.7%).
Inflation, meanwhile, is falling faster than expected.
"Today's forecast lowers the projection for inflation in the EU this year to an average of 3% from 3.5% in the previous forecast," Gentilioni said. "For '25, the projection is at 2.2%, unchanged from autumn. And for the euro area, we see inflation averaging 2.7% this year and 2.2% in '25."
Gentilioni said lower inflation was stoking market expectations that the European Central Bank will cut eurozone interest rates "sooner and more forcefully than anticipated," having raised them in September.
However, "inflation is set to remain higher in central and eastern European, mostly non-euro area member states," said Gentilioni.
Hungary experienced the EU's highest inflation rates in 2023, at 17%, forecast to fall to 4.5% in 2024. This year's highest rate is forecast in Romania (5.8%), and 2025's in Poland (4.7%).
Easing inflation is largely the result of falling energy prices, the commission said.
On Wednesday, it reported that energy prices had risen sharply during 2022-23, following Russia's full-scale invasion of Ukraine.
Average prices for medium-sized businesses in the EU rose to €0.21 ($0.22) per kilowatt-hour (KWh) in 2023, up from €0.18 in 2022, according to the commission's annual "competitiveness" report, published the day before Thursday's forecast.
But Thursday's forecast found that spot prices on energy markets in late 2023 were lower than expected. Prices were finally coming down thanks to "improved supplies and infrastructure (in gas as well as renewables, hydro and nuclear), very high gas inventory levels and subdued demand," the forecast report said.
Nevertheless, the ongoing war in Ukraine continues to have an impact on the EU's economic outlook, Gentilioni said.
While the US outlook for 2023-24 is better, "the EU was more negatively affected by Russia's full scale invasion of Ukraine and higher energy prices, due to our proximity to the war and higher energy import dependency," he said.
The renewed violence in the Middle East this year is also taking its toll on the economy, said Gentilioni. "As shipping through the Red Sea has been rerouted, delivery times for shipments between Asia and the EU have increased by 10-15 days, and the costs of these shipments have gone up by around 400%"