Brussels predicts a sharp drop in growth in 2023 and recession this winter

"The European economy is at a turning point," says the European Commission in the autumn economic forecast published today.

Thomas Osborne
Thomas Osborne
11 November 2022 Friday 03:42
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Brussels predicts a sharp drop in growth in 2023 and recession this winter

"The European economy is at a turning point," says the European Commission in the autumn economic forecast published today. The economic effects of the war in Ukraine and the Kremlin's energy war against Europe are beginning to take a serious toll on the continent and Brussels predicts that in this last quarter of the year "the eurozone as well as most member states will enter a recession", a overturn closely related to the break in Germany.

The economic services of the European Commission calculate that growth in the countries of the euro zone will go from the 3.2% expected for this 2022, higher than expected, to 0.3% in 2023. The collapse is even stronger in the case of Spain, which will close this year with a GDP growth of 4.5% but in 2023 it will only increase by 1%, a drop of 3.5 points, among the largest in the EU, together with Greece (from 6% to 1%), Portugal (from 6.6% to 0.7%).

In July, the community executive predicted that growth would be 2.1% in 2023, a figure that is now halved, with a public deficit above the 3% limit throughout the period, which may be a problem in the medium term, when the stability pact is reactivated. The Spanish economy, however, will not enter a recession: it will only end in negative figures in the last quarter of 2022, when a contraction of 0.3% is expected. The Spanish government's growth forecast for 2023, however, is 2.1%, double what Brussels forecasts, a lag attributed to different calculations on the strength of private consumption and investment.

Germany, for its part, will grow just 1.6% this year but will close 2023 in the red, with a contraction of its economy of 0.6%, the worst figure in the entire euro zone. Growth in France and Italy will also be very limited (0.4% and 0.3% respectively), therefore below what is expected in Spain (1%). "Within the difficult situation that we have just described", the level of growth in Spain in 2023 and 2024 "will be among the highest of the large economies of the euro zone", highlighted the European Commissioner for the Economy, Paolo Gentiloni (Spain could grow 2.4% in 2024, only surpassed by Latvia, 2.6%).

"The shock caused by Russia's war of aggression against Ukraine is affecting global demand and reinforcing inflationary pressures. Due to its geographical proximity to the war and its heavy reliance on gas imports from Russia, the EU is one of the most exposed advanced economies. The energy crisis is eroding the purchasing power of households and weighing on production. Economic sentiment has fallen markedly. Thus, although growth in 2022 will be better than expected, the outlook for 2023 is much weaker in growth and higher in inflation compared to the summer forecasts", details the community executive in its forecasts.

The recession that is expected to start this winter will last, according to Brussels, around two quarters. The contraction in economic activity will continue through the first quarter of 2023 but growth will return in the spring, "as inflation should put pressure on the economy," the document states. However, headwinds will continue to limit economic activity and growth will not exceed 0.3% in the euro zone for the year as a whole.

Inflation forecasts are also worse than expected in July. Prices will close 2022 at higher levels than expected, 8.5% in the euro zone. It will remit in 2023 but, on average, it will continue at around 6.1%; even in 2024 it is not expected to fall below 2.6%, therefore above the 2% referenced by the European Central Bank. The situation will be comparatively better at the price level in Spain than in other neighboring countries: the Brussels forecast is that inflation will go from 8.5% in 2022 to 4.8% in 2023 and 2.3% in 2024.

The situation, however, is "extraordinarily uncertain", admits the European Commission due to the continuation of the war in Ukraine and "the possibility that the economic disturbances may not have ended". The greatest risk will come from the gas market situation and the risk of supply cuts in the winter of 2023-2024. The persistence of inflation will lead to a financial environment marked by higher interest rates than in the past, with the risk, insists Brussels, that the incoherence between the monetary policy and the budgetary policies of the member states will prolong this situation.

“This is a turning point for the EU economy as we grapple with the fallout from Russia's unprovoked war on Ukraine and a complex geopolitical environment: high energy prices fueling inflation, people across Europe struggling against the increase in the cost of living and our companies lose competitiveness," said the Vice President of the European Commission, Valdis Domvrovskis. "Our commitment now is to support the most vulnerable with specific measures, align fiscal and monetary policies to address the inflation and secure our future energy supplies as quickly as possible."

"Russia has once again cast the dark shadow of war on our continent at the end of the year," said Commissioner Gentiloni. "The EU economy has shown great resilience to the shock waves this has caused, thanks in no small part to strong political decisions taken since the start of the pandemic, in a spirit of unity and solidarity." However, he adds, "high energy prices and runaway inflation are taking their toll and we are facing a very challenging period both socially and economically." The challenge, Gentiloni admits, is greater and the uncertainties many. "But of one thing I am sure: if, as Europeans, we stick together, we can successfully navigate these difficulties and come out stronger."