EU Cuts Economic Growth Forecast Weighed Down by Recession-Mired Germany

The European Union has downgraded the economic outlook for 2023 and 2024 amid growing fears of recession. Economic growth in the euro currency area is predicted to reach 0.8 percent in 2023, down from 1 percent projected in the Spring Forecast, as per the European Commission statement.

The economy of the euro zone will grow “with a reduced momentum,” stated the Summer Forecast from the EU’s executive arm.

For 2024, the revised projections showed growth expectations lowered to 1.3 percent from 1.6 percent. As for the overall 27-country bloc, growth forecast was lowered to 0.8 percent from 1 percent this year, and to 1.4 percent from 1.7 percent in 2024.

Headline inflation in the euro area - which reflects the total inflation within an economy - is forecast at 5.6 percent in 2023, and 2.9 percent in late 2024.

The EU explained the gloomier forecast by weak domestic demand, singling out consumption as particularly affected, and stubbornly surging prices for most goods and services. According to EU Economy Commissioner Paolo Gentiloni, “further weakening in the coming months” was anticipated as the continent's economy faces “multiple headwinds.”

Amid the geopolitical shocks and inflation hurdles that have been ravaging the European continent, Germany, with its growth hovering at close to zero, was singled out as particularly dragging down the economic forecast for the EU area. Europe’s largest economy is predicted to contract by 0.4 percent this year amid a prolonged recession.

The German economy was hit particularly hard in the wake of the bloc's self-inflicted woes linked to sanctions against Russia over Ukraine. Loss of cheap Russian natural gas, along with inflation and recession, resulted in Berlin staring at the looming prospect of deindustrialization, as doing business in Germany becomes increasingly unprofitable.

The growth forecast for the EU comes as the European Central Bank (ECB) is gearing up for its meeting on September 14, when interest rate settings may be revisited again. The ECB raised the benchmark rate in the euro area for the ninth consecutive time by a quarter of a percentage point in July. However, at the time, it indicated it could pause rises at its September meeting. At 3.75 percent, it mirrored the highest rate since the launch of the bloc’s currency, the euro, in 1999.

According to minutes of the July meeting released on Thursday, it was stated that "concern was also raised that the economy might be entering a phase of stagflation, in contrast to a more benign scenario”. The economic downturn facing most Western economies will probably continue, ECB President Lagarde underscored on August 25 at the central bank symposium in Jackson Hole.