BRUSSELS: The European Commission has downgraded its forecasts for EU and eurozone growth for 2024 as high interest rates weigh on economic activity, but it said inflation is expected to halve from last year’s highs.
In economic forecasts published on Thursday, the commission said it expected gross domestic product to grow 0.8 per cent in the eurozone this year and 0.9 per cent in the EU, down from 1.2 per cent and 1.3 per cent respectively in its autumn forecast.
The commission added that annual eurozone inflation is expected to fall by half to 2.7 per cent this year from 5.4 per cent in 2023, a steeper drop than to the 3.2 per cent rate previously predicted.
"The EU economy barely expanded throughout 2023 – and prospects for the first quarter of 2024 remain muted," EU Economic Commissioner Paolo Gentiloni told a news conference.
“The rebound expected in 2024 is set to be more modest than projected three months ago,” said Gentiloni, “but to gradually pick up pace on the back of slower price rises, growing real wages and a remarkably strong labour market.”
"Price pressures have moderated faster than previously expected and energy prices are now substantially lower. As a result, while credit conditions are still tight, markets now expect the loosening cycle to start earlier."
Markets expect the European Central Bank to start cutting interest rates this year, possibly in April, from their current record high of 4 per cent.
However on Thursday ECB president Christine Lagarde cautioned that “we need to be more confident” inflation is on track to hit its 2 per cent target before considering cuts.
“It will take data, it will take more time . . . The last thing I want to see is making a hasty decision to see inflation rise again and have to take more measures,” she told the European parliament.
The commission said growth was expected to pick up in 2025, rising to 1.5 per cent in the eurozone and 1.7 per cent in the EU. It also revised output for 2023 down to 0.5 per cent in both areas, following stagnation in the last quarter.
Inflation expectations were revised downward as energy and other commodity prices have come down faster than expected. Eurozone inflation expectations for 2025 remain unchanged and slightly above target at 2.2 per cent. "Lower-than-expected inflation outturns in recent months, lower energy commodity prices and weaker economic momentum set inflation on a steeper downward path than anticipated in the Autumn Forecast," the EU executive arm said in a statement.
But it noted that while inflation will continue to fall, the decline will be slower because EU governments phase out subsidies to energy prices and because shipping costs rise as a result of trade disruptions in the Red Sea.
"By the end of the forecast horizon, euro area headline inflation is projected to post just above the ECB target, with EU inflation a notch higher," the Commission said.
But Gentiloni cautioned that uncertainty was exceptionally high because of geopolitical tensions and the risk of a further broadening of the crisis in the Middle East. The commission warned that trade disruptions in the Red Sea could still deliver upward surprises in inflation.
Philip Lane, the ECB’s chief economist, said the recent rate rises would soon feed into higher mortgage costs. In a speech at the European University Institute on Thursday, Lane said about 30 per cent of loans to eurozone households would be repriced at a higher rate over the next year due to the “ongoing transmission” of higher borrowing costs into the broader economy. “More and more people who might have taken out loans at a lucky time will be exposed to higher rates,” he said.
He said there was a wide disparity in the share of households expected to face more expensive financing, varying from 10 per cent in Germany and France, to 60-70 per cent in Italy and Spain.
Eleven EU economies including the largest, Germany, suffered a contraction in growth in 2023. However, in its latest projections, the commission forecast that all 27 member states would experience positive growth in 2024.
Companies are struggling to adapt to the bloc’s tougher business environment. As pandemic-era financial support was unwound in many countries, the number of bankruptcies increased 0.6 per cent in the final quarter of last year, according to Eurostat, the EU’s statistics office. However, the number of business registrations increased 0.1 per cent from the previous three-month period, marking the fourth consecutive quarterly increase.