EU economy to ‘narrowly’ avoid a recession as inflation peak passes, Brussels projects

The European Union’s economy is set to “narrowly” avoid a much-dreaded recession this year, as inflation eases and gas prices continue their steep drop, paving the way for better-than-expected economic performance, the European Commission has said in its latest forecast.

The report, released on Monday morning, offers a glimmer of good news amid a still highly uncertain and challenging landscape that remains intrinsically dependent on what step Russia takes next in its brutal invasion of Ukraine, which is nearing its one-year anniversary.

Still, the European Commission is able to project the EU as a whole will see a growth rate of 0.8% in 2023 – up from 0.3% in the previous forecast.

The eurozone will meanwhile expand by 0.9% – up from the 0.3% estimated in autumn.

“While uncertainty surrounding the forecast remains high, risks to growth are broadly balanced,” the report says.

Among the 27 member states, Sweden is the only one that shows a negative number for this year (–0.8%) while the rest present limited but positive growth.

Germany and Italy, two countries that were highly dependent on Russian fossil fuels and widely expected to fall into a deep recession, have projected rates of 0.2% and 0.8%, respectively.

A technical recession is defined as two-quarters of economic contraction, something that might still happen in some countries even if the final number for 2023 ends up being positive.

For their part, France will grow by 0.6% while Spain will increase by 1.4% across 2023.

On inflation, the European Commission believes the record-breaking peak has passed and prices will gradually follow the downward trend that began late last year.

Inflation in the eurozone is projected to fall to 5.6% in 2023 and to 2.5% in 2024, bringing the figure closer to the 2% annual target set by the European Central Bank.

Nevertheless, the executive warns, core inflation, which excludes the volatile prices of energy and foods, “has not yet peaked.”

“Risks to inflation remain largely linked to developments in energy markets, mirroring some of the identified risks to growth,” the report says.

The European Commission’s winter forecast builds on a series of projections that in recent weeks have improved the outlook for the bloc, including those from the International Monetary Fund, J.P. Morgan and Goldman Sachs, that have pushed away the threat of recession.