IMF improves economic forecast for the eurozone and Russia amid energy crisis and raging war

The prospect of a recession in the eurozone is fading as the International Monetary Fund (IMF) moderately improves its economic forecast for the bloc.

The eurozone is now projected to grow 0.7% this year – up from 0.5% in the previous forecast – and 1.6% in 2024.

Germany, the continent’s industrial powerhouse, will see growth of just 0.1% –  a timid performance but a considerable increase from the –0.3% estimated in October.

France will expand by 0.7% while Italy will post a 0.6% rate in 2023.

In its latest forecast released on Tuesday, the IMF highlights the resilience and adaptation of the European economy in the face of Russia’s war in Ukraine, the energy crisis and soaring inflation, but warns risks and uncertainty remain elevated.

“There are a lot of risks, but our baseline (scenario) is for the euro area not to be in a recession this year,” Petya Koeva Brooks, Deputy Director in the IMF’s Research Department, told Euronews.

“Growth of 0.7% is, by historical standards, not a great number. But we are also expecting things to bottom up and for the outlook to be better in 2024.”

European industries have spent the last year walking a tightrope between keeping their engines running and filing for bankruptcy, an expensive and frantic effort that has led to the redesign of long-established production lines.

The shadow of gas rationing weighed heavily upon the manufacturing sector because households and public services are considered the top priority in the case of severe shortages.

“This has been a major supply shock and we’ve seen a lot of adjustments to all of that. Now, it doesn’t mean that it’s going to be easy,” Koeva Brooks said.

“But it’s also an opportunity for companies to, again, diversify their sources of energy and potentially move to less energy-dependent modes of production, which would be good in the long run as well.”

The IMF update comes as Europe’s gas prices fell back to pre-war levels: the Title Transfer Facility (TTF), the continent’s leading trade hub, closed on Friday at €55.4 per megawatt-hour, levels not seen since December 2021.

The recent drop in gas prices has prompted several institutions and banks, such as J.P. Morgan and Goldman Sachs, to declare the eurozone shouldescape a recession, which many had described as inevitable when Vladimir Putin launched the invasion of Ukraine. 

Russia to grow slowly amid sanctions

For the global economy, the IMF’s latest forecast predicts a growth rate of 2.9% in 2023 and 3.1% in 2024.

Besides the war and the energy crisis, the organisation points to the COVID-19 surge in China, higher interest rates, financial instability and geopolitical fragmentation as factors that could potentially hamper this year’s economic progress.

However, “adverse risks have moderated” since the previous forecast, the IMF says, leading to upwards revisions in most analysed countries.

The steepest improvement is seen in Russia, which, despite a vast array of Western sanctions, is now projected to grow 0.3% in 2023 – a massive jump from the –2.3% contraction estimated in October.

The IMF says Russia is finding new clients outside the West by redirecting trade “from sanctioning to non-sanctioning countries.” Strong government spending to sustain the army and the invasion of Ukraine has also helped maintain economic activity amid the upheaval.

But, Koeva Brooks warned, the impact of Western sanctions is yet to materialise in full.

“The Russian economy is quite dependent on capital goods coming from Western countries. As time goes by, the impact of those sanctions, we expected it to be actually higher,” she told Euronews.

“If you look at the medium term, if we look out in 2027, the level of output that we are projecting for the Russian economy is significantly below what it was prior to the war. The war is expected to have a very permanent and sizeable impact on the Russian economy.”