Reduced GDP Growth Estimates, Inflation Expected to Slow

The European Commission has reduced its estimates for the economies in the EU, which continue to grow, but at a slower pace than previously estimated, and expects inflation to continue to slow down.

The Commission published temporary summer economic forecasts on Monday with data on GDP and inflation trends in the six largest economies in the EU, in the euro area, and in the EU as a whole. Data from the remaining 21 member states were taken into account in the aggregate data for the euro area and EU27.

In addition to the data being published only for the six largest economies, instead of for all member states, this year’s summer forecasts were published in September, instead of July as before. The six strongest economies in the EU are Germany, France, Italy, Spain, the Netherlands, and Poland.

The Commission has reduced the GDP growth estimate for the EU27 for this year to 0.8 percent from 1 percent, which was predicted in the spring economic forecasts. For next year, it has lowered the growth estimate from 1.7 percent to 1.5 percent.

As for the euro area, a growth of 0.8 percent is expected this year (it was 1 percent in the spring forecasts). The growth estimate for next year in the euro area is now 1.3 percent, instead of the previous 1.6 percent.

Inflation is expected to continue to slow down. The harmonized index of consumer prices (HICP) is expected to be 6.3 percent in the EU27 this year, compared to 6.7 percent in the spring forecasts. In the euro area, inflation is estimated to slow to 5.6 percent this year (it was 5.8 percent in the spring forecasts), and to fall to 2.9 percent next year, while the estimate in the spring forecasts was 2.8 percent.

The harmonized index of consumer prices (HICP) typically covers around 700 types of goods and services. It is an indicator of average household consumption in the euro area for a basket of products.

Slowing Inflation

Inflation is slowing due to falling energy prices and reduced inflationary pressure from food and industrial goods prices. The Commission expects energy prices to continue to decline for the rest of the year, but at a slower pace.

A slight increase in energy prices is expected next year due to rising oil prices. The increase in service prices is more stubborn than previously expected, but it should begin to slow under the influence of tightening monetary policy and the weakening of post-COVID incentives.

Food prices and non-energy industrial products will continue to contribute to the slowing of inflation, as will lower input costs and the normalization of supply chains.

German GDP Will Decline This Year

The Commission estimates that the strongest economy in the EU, Germany, will experience a GDP decline of 0.4 percent this year, and a growth of 1.1 percent is expected next year.

The other five economies are expected to grow. Spain has the highest estimates, with its GDP expected to grow by 2.2 percent this year and 1.9 percent next year. The French economy is expected to grow by 1 percent this year and 1.2 percent next year, the Italian economy by 0.9 percent this year and 0.8 percent next year, the Dutch economy by 0.5 and 1 percent, and the Polish economy by 0.8 this year and 1.4 percent next year.

– The latest data shows that economic activity in the EU was subdued in the first half of 2023 after the severe shocks that the EU has endured. The weakness of domestic demand, particularly consumption, indicates that consumer prices for most goods and services are high and still rising, taking a greater toll than expected in the spring forecasts – the Commission assesses.

The Labor Market Remains Strong

The labor market remains exceptionally strong, with record-low unemployment rates, rising employment, and increasing wages. A sharp decline in bank lending to businesses indicates that tightening monetary policy is affecting the economy.

Survey indicators now point to a slowdown in economic activity during this summer and the next few months, with ongoing weakness in industry and a weakening momentum in the services sector, despite a strong tourist season in many parts of Europe, the Commission notes.