EU pulls out of recession thanks to boost from governments – Politico

According to the European Commission, the EU economy appears poised to avoid recession as governments weather the ongoing fallout from Russia’s war in Ukraine.

As recently as November, the EU was on track for two consecutive quarters of negative growth — technically a recession — due to the economic fallout from the war, particularly in energy markets.

But the eurozone narrowly escaped with growth of 0.3 percent in the third quarter and 0.1 percent in the final quarter of 2022, according to the Commission’s latest economic forecast. It raised the annual 2022 eurozone growth estimate to 3.5 percent, from 3.2 percent previously.

The pace translates into expected-higher growth for 2023, at 0.9 percent in the eurozone and 0.8 percent in the EU, compared with 0.3 percent for both in the November forecast. Output projections for 2024 remain unchanged, at 1.5 percent for the single currency area and 1.6 percent in the bloc.

Economic resilience is a win for the European Union, which is grappling with unprecedented sanctions against Russia and dealing with rising energy prices and the need to insulate itself from Russian power.

“These are very positive signs of EU resilience,” said EU Economy Commissioner Paolo Gentiloni. “The good picture reflects the strength of the general response to shocks from 2020, yet Europeans still face a tough time.”

Of the three countries that were forecast to record negative growth in 2023, only Sweden is expected to fare worse than expected at -0.8 percent. Germany, the bloc’s economic engine, is expected to remain in positive territory this year, at 0.2 percent, about one percentage point higher than the -0.6 percent previously expected. Latvia will also avoid recession, growing by 0.1 percent this year.

Among other EU members, only Estonia, Lithuania and Poland revised their growth slightly downward, while others were flat or exceeded earlier forecasts.

Inflation is on the rise

The Commission also believes that headline inflation has peaked, as energy markets have calmed down, benchmark gas prices have returned to their pre-war levels and oil prices have fallen.

Inflation is now forecast to slow further this year, to 6.1 percent and 7 percent in the eurozone against previous estimates of 5.6 percent and 6.4 percent respectively, and to reach levels slightly above the 2 percent target by the end of 2024. Still, core inflation — stripping energy and food — rose further in January.

Upside risks include a tight labor market — unemployment hit a historic low of 6.1 percent in December — which could create strong wage growth and inflationary pressures. Even if gas storage levels are high due to low cost, it may be difficult to refill them before next winter.

Continued monetary tightening by central banks could send shockwaves through indebted companies and the banking system as well as mortgages, creating a correction in the property market.