EU cuts growth forecast as recession hits Germany

Economic growth in the euro zone area will be slower than expected, the European Commission forecast on Monday, warning of the knock-on impacts of recession in Germany, the bloc’s largest economy.

The gross domestic product (GDP) of the single currency area is to grow by 0.8 per cent in 2023 and 1.3 per cent in 2024, a cut compared to the previous forecasts in May of growth of 1.1 per cent and 1.6 per cent.

“The EU economy has lost momentum since spring,” the European commissioner for economy Paolo Gentiloni, told reporters.

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Economic activity at the start of the year was “very subdued” and effectively “stalled” on the whole in the European Union, he said, adding that current indicators suggest there would be a “further weakening in the coming months”.

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The German economy is now seen shrinking 0.4 per cent this year, instead of growing by 0.2 per cent as had been forecast in May. It forecast that it would grow by 1.1 per cent in 2024, instead of the previously expected 1.4 per cent.

“The German economy is in a moment of slightly negative growth,” Mr Gentiloni said. “Overall of course, if the largest economy of the union is in slightly negative growth this is affecting everyone.”

Germany was hit hard by Russia’s cut to gas supplies as it invaded Ukraine, removing a source of cheap energy that had once powered its industrial base, and persistent inflation has weighed on consumer behaviour.

It was set to be the worst-performing economy out of the six largest EU economies studied by the European Commission for its summer 2023 forecast, which predicted that none of the others would fall into recession.

Spain was forecast to have the strongest performance this year, with 2.2 per cent growth.

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Overall inflation across the EU has been declining slightly faster than expected, and is expected to be 5.6 per cent in 2023 and 2.9 per cent in 2024.

In a departure from usual practice, there was no separate forecast for the rest of the EU economies including Ireland, and the publication of the forecast was moved to September from July.

The European Commission warned that there was significant uncertainty about the outlook and in particular warned of the impact of climate change, after a summer of severe weather in Europe.

“Climate risks, illustrated by the extreme weather conditions and unprecedented wildfires and floods in the summer, also weigh on the outlook,” Mr Gentiloni said. “We should take this very seriously.”