Explained: Why the EU economy may be heading for a ‘soft landing’

The European economy is “heading for a soft landing” despite the persistence of high prices globally, an economist told Euronews.

Inflation has been declining over the past several months in the European Union, with it expected to be 6.9% in March, according to Eurostat.

That’s after the annual inflation rate tripled in 2022, reaching 9.2% in the euro area due to the fallout from the COVID-19 pandemic and the war in Ukraine.

But with energy prices down due to mild winter weather, inflation has been easing up.

“I certainly think the situation in Europe is considerably better than I would have predicted a few months ago,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute For International Economics.

The International Monetary Fund (IMF) warned last week that inflation has remained persistent globally and downgraded its outlook for economic growth. But it slightly upgraded its growth forecast for the US and Europe in 2023.

Petya Koeva-Brooks, deputy director of the IMF Research Department, told Euronews last week she was surprised that euro area economies have adjusted to the economic shock and that the IMF is expecting a pick up of growth in 2024.

But while Europe overall avoided an all-out recession last year, inflation “remains stubbornly high,” according to Alfred Kammer, the IMF’s European department director, who was speaking about the larger European region.

At a press conference last week, Kammer said that while energy prices have fallen, “prices of other household expenses are still increasing at a fast pace” and that Europe’s outlook remains one of “slow growth and sticky inflation”.

“It is in double digits in most emerging European economies and some advanced economies.”

But, Kammer explained: “The biggest problem we saw last year was a big concern that a Russian gas shut-off could bring the European economy to a halt in the winter. It did not happen. And that would have been a big recession in Europe.”

He said the low growth forecast for 2023 was due to the effects of the war and energy crisis and that while headline inflation is projected to decline, core inflation will still be above central bank targets by end-2024.

‘No runaway inflation in Europe’

Kirkegaard, meanwhile, remains optimistic. He said that he expects one to two more interest rate rises from the European Central Bank followed by a return to “monetary or inflation normalisation.”

He added that EU economies have not yet felt the full impact of the ECB’s current monetary policy, which works with a lag.

Population demographics may also play a role in whether inflation continues in advanced economies, he said, with ageing populations lowering demand.

“I don’t think we are going to have runaway inflation in Europe, but I think in a country like the United States, for instance, I think it will be difficult for the Federal Reserve to get all the way back to 2%…I’m much more optimistic in Europe, Japan and other countries that are ageing rapidly,” he said.

The current cost of living crisis has also considerably lowered the purchasing power of consumers and led to strikes and protests over pay.

“It’s important to recognise that in 2022, across Europe on average we had the largest decline in purchasing power in decades,” said Kirkegaard.

“We should not generally be afraid of workers having higher wages, because what we also have seen in the euro area in recent years is very strong corporate profits and that’s also very much true in the United States. So having a redistribution away from the owners of capital towards workers through higher real wages, I think is appropriate,” he added.