The European Commission recently released updated projections that point to a moderate recovery in the spring.
The recession follows winter like a shadow. On Friday, the European Commission announced a significant downward revision to its forecasts for the European economy, which has been plagued by high levels of inflation and rising energy prices. It forecasts that we will enter a recession during the final three months of this year, and that recession will continue into the first three months of 2023. Paolo Gentiloni, the European Commissioner for the Economy, summed up the situation by saying that “We have difficult months ahead of us.”
The EU executive anticipates that the growth in the gross domestic product (GDP) for the euro area will be approximately 3.2% and 3.3% for the Union as a whole in 2022, which is significantly higher than the previous forecasts (2.7%). After emerging from a historic recession in the year 2020, the economy of Europe has, up to this point, handled the effects of the conflict in Ukraine more successfully than was anticipated. Because of the expansive fiscal policies that the government has implemented to assist businesses and households. However, we are now moving into a much more precarious phase of the economy. It is common knowledge that the following factors contributed to the decision to switch: rising costs of energy, diminishing purchasing power of households, unpredictability, and increasingly stringent conditions for obtaining financing. Paolo Gentiloni observes that “the shock of the war is taking over.” Enough to push the European Union, the eurozone, and the majority of its member states into a technical recession, which can be defined as a decline in the gross domestic product (GDP) for two consecutive quarters.
The projections for the year 2023 have also undergone a significant downward revision. GDP growth will remain slightly positive, remaining steady at 0.3% for countries sharing a single currency and the Union (compared to the 1.4% expected so far). It is particularly the sharp drop in production across the Rhine that will contribute to dragging the Union into recession this winter. [Citation needed] [Citation needed] [Citation needed] [Citation needed] [Citation The German economy, which has traditionally been highly reliant on importing gas from Russia, has taken a significant hit as a direct result of the conflict in Ukraine. It will post the worst performance in the eurozone, with a recession of 0.6% in 2023, before starting back up the following year with a level of growth comparable to that which it experienced in 2022. In addition to Spain (1%) and the Netherlands (0.4%), France (0.4%), Italy (0.3%), and the Netherlands (0.4%) will all experience significant economic slowdowns in the coming year.
However, according to the European executive, a recovery is forecast to begin in the spring of 2023. This is “as inflation gradually loosens its grip on the economy,” the executive states. Paolo Gentiloni emphasizes that this rebound will be “moderate” even though the negative shock on energy prices will continue for some time. After that, growth should pick up significantly in 2024 (a 1.6% increase for the EU, and a 1.5% increase for the eurozone).
A higher level of inflation
Despite everything, there is a glimmer of light in this murky situation, and that is the labor market, which holds up relatively well. It is anticipated that the expansion of the employment rate in the EU will reach 1.8% in 2022, after which it will level off in 2023 and then pick up moderately (+0.4%) in 2024.
Regarding the cost of goods and services, Brussels forecasts that inflation will be higher than anticipated at 8.5% (compared to the earlier forecast of 7.6%). The good news is that by the end of the year, the price increase should have reached its maximum level, which is estimated to be 9.3%. If it continues to be high in 2023, inflation is projected to fall to 7% in the EU and 6.1% in the eurozone. It is then projected to stabilize in 2024 at 3% and 2.6% respectively. In 2023, inflation along the Rhine would be significantly higher than average (7.5%) and almost double that of France (4.4%). It has already reached a level that is higher than ever before across the Rhine (see box).
Paolo Gentiloni issued a warning that even though”uncertainty remains exceptionally high” because of the war, this could lead to even worse figures. The challenges that arise when trying to replenish the gas reserves in time for the winter of 2023-2024 will be an important factor. If we were to fail on this front, it would lead to a much more pessimistic scenario, in which the GDP might decrease by 0.9% in 2023 and inflation might remain more stable.