Concerns persist about China’s recovery from COVID-19 lockdowns, and the United States is facing talk of a potential recession. However, the economic outlook for Europe has recently brightened, as indicated by the European Commission’s upgraded growth forecast.
The EU’s executive arm announced on Monday that it now expects the EU economy to expand by 1% this year, up from the previous estimate of 0.8% in February. Additionally, growth for the following year has been revised upward by 0.1 percentage points to 1.7%.
While the improved forecast for Europe still signifies a significant slowdown compared to the 3.5% growth experienced last year, there are several factors contributing to the positive outlook. Lower energy prices have reduced costs for businesses and eased financial strain on households. Furthermore, a robust job market and continued government stimulus measures are providing a boost to the economy.
Nevertheless, the European Commission acknowledged that rising borrowing costs aimed at curbing inflation will weigh on future growth. The European Central Bank recently raised interest rates by a quarter of a percentage point, signaling its intention to implement further rate hikes due to persistently high inflation.
Paolo Gentiloni, the European Commission’s economy minister, highlighted the contrasting factors influencing the forecast: declining energy prices and a resilient labor market on one hand, and tightening financial conditions on the other. Heightened risk perception among banks following recent sector turmoil has made credit access more challenging, while rising interest rates have dampened loan demand.
The European Union is also expected to experience significant divergence among its member countries. Germany, the bloc’s largest economy, is projected to face a sharp slowdown, with growth estimated at 0.2% in 2023. Conversely, Italy’s output could increase by 1.2%, and Portugal’s economy may expand by 2.4%.
Industrial production data for Europe released on Monday indicated signs of weakness, with a 4.1% decline in March among eurozone countries, worse than economists had anticipated. Given the exhaustion of certain favorable factors such as lower energy prices and eased semiconductor shortages, combined with the challenges posed by tighter monetary policy, experts expect industrial output to contract slightly for the remainder of the year.
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