Europe’s economy is expected to grow faster than previously thought this year and next, despite high inflation and rising interest rates, according to the European Commission.
The commission said the EU’s 27 members would grow at an average of 1% in 2023, up from a previous estimate of 0.8%. It nudged its forecast for growth in 2024 to 1.7% from 1.6%.
The eurozone’s 20 members are expected to grow by 1.1% on average and 1.6% next year.
By comparison, the UK economy is expected to be weaker, with growth of 0.25% expected this year and 0.75% in 2024, according to the Bank of England.
With fears of a recession easing, EU growth so far this year has been stronger than expected when the last growth estimates were made in February, the commission said.
“The EU economy is managing the adjustment to the shocks unleashed by the pandemic and Russia’s aggression of Ukraine remarkably well,” it said in a report.
“Last year, the EU successfully managed to largely wean itself off Russian gas.”
Ireland will lead EU growth league over the next two years as it has done over the past two years.
Dublin is forecast to enjoy a growth rate of 5.5% and 5% in 2023 and 2024, respectively, after chalking up a growth rate of 13.6% in 2021 and 12% in 2022.
France’s growth rate will accelerate from 0.7% in 2023 to 1.7% in 2024 while Germany’s economy, which was hit hardest by sanctions on Russian gas, is expected to expand by 0.2% this year and 1.4% next year.
Estonia and Sweden are the only EU countries to suffer a contraction this year – Sweden by 0.5% and Estonia by 0.4%, before both make modest recoveries in 2024.
For the first time, European Commission officials examined the prospects for Ukraine’s economy in its quarterly forecast – a move made in response to Brussels accepting the war-torn country as a candidate for EU membership last year.
The report said that before the Russian invasion last year, Ukraine’s economic development had been held back by “a somewhat uneven implementation of structural reforms”.
It also suffered from regular interference from vested interests, plus “a high degree of corruption, chronically low levels of investment, and territorial disputes also linked to the 2014 illegal annexation of Crimea by Russia”.
Yet Ukraine had demonstrated remarkable resilience during the war and much of its economy was able to continue operating.
Ukraine’s GDP is estimated to have slumped by 29% in 2022. This year growth is expected to be just 0.6%, rising to 4% in 2024, the commission said, although the path of the war will be crucial to the outcome for economic growth.
The commission said that overall the forecasts were good news for European households and businesses.
“The European economy has managed to contain the adverse impact of Russia’s war of aggression against Ukraine, weathering the energy crisis thanks to a rapid diversification of supply and a sizeable fall in gas consumption.
“Markedly lower energy prices are working their way through the economy, reducing firms’ production costs.
It added: “Consumers are also seeing their energy bills fall, although private consumption is set to remain subdued as wage growth lags inflation.”
Inflation remains higher than expected, as it has done in the UK, and was revised upwards compared with the winter forecast.
Prices growth is now expected to average 5.8% across the eurozone in 2023, and drop to 2.8% in 2024 due to “persisting core price pressures”. Like the Bank of England, the European Central Bank (ECB) has a 2% inflation target.
The report said there was a risk inflation would persist, forcing the ECB to maintain high interest rates. European Commission officials warned individual countries against embarking on a spending spree to boost growth, saying this would “lean against” monetary policy and force a further tightening.
Previously, inflation was forecast to average 5.6% this year in the eurozone, and 2.5% in 2024.
The ECB has indicated that it will increase interest rates for the eurozone by at least 0.5 percentage points during the summer to almost 3.75% on its main deposit rate to reduce the pressure on prices.
