San Francisco Frontiers - EU cuts growth and inflation forecasts for 2024

The forecasts by the EU's executive arm demonstrate the impact of the European Central Bank's interest rate-hiking campaign last year: a welcome fall in inflation, predicted to drop to 2.7 percent, but also worryingly sluggish growth, expected to reach just 0.8 percent.

Although the Frankfurt-based ECB has held rates steady so far in 2024, it is widely expected to begin cutting rates later this year in the face of slowing consumer prices and a weakening eurozone economy.

Inflation soared in the aftermath of Russia's invasion of Ukraine in 2022, sending energy prices sky-high as Europe scrambled to find alternative power sources.

Reflecting lower energy prices, the commission revised its inflation forecast sharply down from 3.2 percent -- although it still remains above the ECB's two-percent target.

"Lower energy commodity prices, weaker economic momentum and recent inflation outturns set inflation on a lower path, lower than was anticipated last autumn," the EU's economy commissioner, Paolo Gentiloni, told reporters in Brussels.

The commission's 2024 growth forecast for the 20-country eurozone, at 0.8 percent, also marks a sharp downward revision from the previous forecast of 1.2 percent.

"After narrowly avoiding a technical recession in the second half of last year, prospects for the EU economy in the first quarter of 2024 remain weak," it said.

But Gentiloni tempered the gloomy outlook by stressing that "the conditions for a gradual acceleration of economic activity this year are still in place."

Brussels expects growth to reach 1.5 percent next year, with Gentiloni pointing to "a strong labour market, easing inflation, rising wages, the expected gradual easing of credit conditions" as factors likely to support growth.

- EU 'underperforming' -

For now, however, EU officials consider that the eurozone is underperforming compared to the rest of the world. The United States' full-year economic growth accelerated to 2.5 percent last year.

The reason for this, Gentiloni said, was that US consumers benefited from a larger pandemic stimulus than in Europe, adding that the bloc was also hit harder by the impact of the war in Ukraine on energy prices.

"The EU underperformed the US in 2023 and is set to do so again this year," he said.

Gentiloni also said "surprises in China's economic growth" and "higher for longer policy rates in the US could worsen global financial conditions".

Commission executive vice president Valdis Dombrovskis warned "the global landscape remains highly uncertain" amid fears that the conflict in the Middle East could broaden beyond Israel and Gaza.

"We are closely tracking geopolitical tensions, which could have a negative impact on growth and inflation," he said in a statement.

The commission was, however, optimistic that despite the expiry of energy support measures and trade disruptions in the Red Sea, those issues would not derail the drop in inflation in the longer term.

"Going forward, we expect inflation to continue moderating, falling to just above two percent by the end of 2025," Gentiloni said.

- Weaker German economy -

The eurozone has been weighed down by the area's largest economy, Germany.

The commission significantly downgraded its forecast for Germany, expecting growth of only 0.3 percent in 2024, down from its autumn prediction of 0.8 percent.

"Private consumption suffered from a loss in purchasing power. Activity in the construction and energy intensive sectors was restrained by strong cost increases and labour shortage," Gentiloni said about Germany's woes.

But the commission still expects the German economy to grow by 1.2 percent in 2025.

France, the EU's second-biggest economy, is doing better than Germany but the commission also cut its growth forecast for France to 0.9 percent from 1.2 percent.

And it slightly downgraded its prediction for the French economy in 2025, expecting growth of 1.3 percent, down from 1.4 percent in the autumn forecast.

F.Young--SFF