As the EU economy continues to grow, inflation is expected to continue to decline over the forecast horizon. Earlier this week the European Commission revealed an updated growth forecast during the Summer 2023 Economic Forecast taking place in Brussels.
Harmonised index of consumer prices (HICP) inflation is now projected to reach 6.5% in 2023 (compared to 6.7% in the spring) and 3.2% in 2024 (compared to 3.1%) in the EU. In the euro area, inflation is forecast to be 5.6% in 2023 (compared to 5.8%) and 2.9% in 2024 (compared to 2.8%).
Latest data confirm that economic activity in the EU was subdued in the first half of 2023 on the back of the formidable shocks that the EU has endured. Weakness in domestic demand, in particular consumption, shows that high and still increasing consumer prices for most goods and services are taking a heavier toll than expected in the Spring Forecast. This is despite declining energy prices and an exceptionally strong labour market, which has seen record low unemployment rates, continued expansion of employment, and rising wages. Meanwhile, the sharp slowdown in the provision of bank credit to the economy shows that monetary policy tightening is working its way through the economy. Survey indicators now point to slowing economic activity in the summer and the months ahead, with continued weakness in industry and fading momentum in services, despite a strong tourism season in many parts of Europe.
“The EU avoided a recession last winter – no mean feat given the magnitude of the shocks that we have faced. However, the multiple headwinds facing our economies this year have led to a weaker growth momentum than we projected in the spring. Inflation is declining, but at differing speeds across the EU. And Russia’s brutal war against Ukraine continues to cause not only human suffering but economic disruption.”, says Italian politician Paolo Gentiloni, who has served as European Commissioner since 1 December 2019.
Around the globe, economy has fared somewhat better than anticipated in the first half of the year, despite a weak performance in China. However, the outlook for global growth and trade remains broadly unchanged compared to spring, implying that the EU economy cannot count on strong support from external demand.
Overall, the weaker growth momentum in the EU is expected to extend to 2024, and the impact of tight monetary policy is set to continue restraining economic activity. However, a mild rebound in growth is projected next year, as inflation keeps easing and the labour market remains robust.
Why inflation may decline further?
Inflation continued easing in the first half of 2023 as a result of declining energy prices and moderating inflationary pressures from food and industrial goods. In the euro area, it reached 5.3% in July, exactly half of the peak level of 10.6% recorded in October 2022, and remained stable in August.