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EU Economy Forecast: Is the Worst Over?

Growth prospects in the euro area at 0.9%. However, high energy costs continue to weigh

Overall inflation is expected to fall from 9.2% in 2022 to 6.4% in 2023, down to 2.8% in 2024.

Almost a year into the Russo-Ukrainian war, estimates for the European Union's economy are better than expected. The interim winter forecasts raise the growth prospects for this year to 0.8% in the EU and 0.9% in the euro area. Just enough to avoid the "technical recession expected for the end of the year", reads a statement from the European Commission. In addition, the forecast updates the inflation projections for both 2023 and 2024 downwards. The annual growth rate for 2022 is now estimated at 3.5% in both the EU and the euro area.

"The favorable developments compared to the autumn forecasts have improved growth prospects for this year - continues the press release -. The continued diversification of supply sources and the sharp decline in consumption have left gas storage levels above seasonal average in recent years and wholesale gas prices have fallen well below pre-war levels.As for the unemployment rate, it remains at an "historic low" of 6.1% until the end of 2022. “Confidence is picking up and January analyzes suggest that economic activity should also avoid a contraction in the first quarter of 2023”.

Nonetheless, "headwinds, however, remain strong", with "consumers" and "businesses" still having to contend with "high energy costs", while "core" inflation (headline inflation excluding energy and unprocessed foods ) is still rising in January and is further eroding household purchasing power. "As inflationary pressures persist, monetary tightening is likely to continue, weighing on economic activity and holding back investment." Winter interim forecast growth for 2023 of 0.8% in the EU and 0.9% in the euro area is respectively 0.5 and 0.6 percentage points higher than in the autumn forecast. The growth rate for 2024 remains unchanged, at 1.6% and 1.5% respectively for the EU and the euro area. By the end of the forecast horizon, the production volume is expected to exceed the autumn forecast by almost 1 percent.

After peaking in 2022, inflation will ease over the forecast horizon. Three consecutive months of moderation in headline inflation suggest that the peak is behind us, as anticipated in the autumn forecast. After reaching an all-time high of 10.6% in October, inflation eased, with the January flash estimate falling to 8.5% in the euro area. The decline was mainly driven by the decline in energy inflation, while "core inflation" has not yet peaked. The inflation forecast has been revised slightly downwards compared to the autumn, mainly reflecting the evolution of the energy market. Headline inflation is expected to fall from 9.2% in 2022 to 6.4% in 2023 and 2.8% in 2024 in the EU. In the euro area, a slowdown is expected from 8.4% in 2022 to 5.6% in 2023 and 2.5% in 2024.

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