The eurozone economy is entering the year on a weaker footing than previously expected, according to new EU forecasts that anticipate another year of subdued growth.
GDP in the currency bloc would accelerate only slightly to 0.8 percent this year after 0.5 percent last year, the European Commission said in a report yesterday.
In November last year, it had predicted a more marked improvement to 1.2 percent. It also cut its forecast for next year to 1.5 percent from 1.6 percent.
Photo: Reuters
“The rebound expected in 2024 is set to be more modest than projected three months ago, but to gradually pick up pace on the back of slower price rises, growing real wages and a remarkably strong labor market,” EU Commissioner for Economy Paolo Gentiloni said in a statement.
While next year should see firmer growth and inflation would likely decline to close to the European Central Bank’s (ECB) 2 percent target, he warned that “geopolitical tensions, an ever more unstable climate and a number of crucial elections around the world this year are all factors increasing the uncertainty around this outlook.”
The updated assessment adds to signs that the eurozone risks slumping into a an extended period of weakness, even as prospects for the rest of the world improve.
In recent weeks, both the IMF and the Organisation for Economic Co-operation and Development cut their GDP forecasts for European nations for this year, while revising upward global expectations.
While the latest data for the end of last year showed the region narrowly avoided a recession over the winter, there is little sign of a quick turnaround.
“The EU economy has entered 2024 on a weaker footing than expected,” the commission said. “Prospects for the EU economy in the first quarter of 2024 remain weak.”
So far, the deterioration in the eurozone outlook has not caused the ECB to reconsider its record-high 4 percent interest rate, although policymakers acknowledge that borrowing costs would be reduced this year.
The commission said strong monetary tightening was one reason for the weak performance of the economy last year, alongside inflation hurting consumers and governments starting to withdraw fiscal support.
ECB President Christine Lagarde — speaking to EU lawmakers on Thursday — cautioned again rushing into rate cuts as rising salaries becoming an ever-more significant driver of inflation.
The ECB already lowered its growth outlook for this year in December last year and the commission is now in line with central bank’s 2.7 percent prediction for inflation.
For next year, officials in Frankfurt see inflation at 2.1 percent, while their colleagues in Brussels predict 2.2 percent.
Eight of the eurozone’s 20 members contracted last year. While none are predicted to suffer that fate again this year, growth rates are still muted — particularly in the bloc’s three biggest economies. Germany is set to expand just 0.3 percent — down from 0.8 percent predicted in November last year — and the commission also cut its forecasts for France and Italy.
“Incoming data continue to signal subdued activity in the near term,” Lagarde said. “However, some forward-looking survey indicators point to a pickup in the year ahead.”
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