Remarks by Commissioner Gentiloni at the Eurogroup press conference
Good morning and welcome to this press conference on the European Commission’s Winter Economic Forecast.
Let me begin with the four key messages emerging from this forecast:
First, the EU economy entered 2023 on a healthier footing than expected, and looks set to escape recession.
Since autumn, the EU economy has seen a number of positive developments. The European gas benchmark price has fallen below its pre-war level, helped by demand restraint and diversification of supply sources. And of course, exceptionally mild weather. A better than previously expected turnout for growth at the end of last year and improving economic sentiment suggest that the EU economy is thus set to narrowly escape the technical recession that was projected back in autumn.
Second, and linked to the first point, the growth forecast for this year is revised slightly higher
EU GDP growth for 2022 is now estimated at 3.5%, 0.3 percentage points higher than projected in Autumn.
For 2023, the EU economy is forecast to expand by 0.8%, 0.5 pps. above the Autumn projection.
Third, headline inflation has peaked and is set to decline further
Thanks to rapidly declining energy prices, this new forecast has lowered the projections for inflation.
Headline inflation in the EU is forecast to fall from 9.2% in 2022 to 6.4% in 2023 and 2.8% in 2024. This compares with the Autumn projections of 7.0% in 2023 and 3.0% in 2024.
Fourth, risks appear more balanced.
While past risks related to pandemic and gas shortages have ebbed significantly, uncertainty remains very high in relation to the Russian war of aggression and to broader geopolitical tensions.
I’ll now outline the main points of our forecast in more detail.
The EU economy posted a positive growth surprise in the second half of last year. First, the slowdown in momentum in the third quarter turned out milder than previously estimated. Then in the fourth quarter, the EU economy stagnated, instead of the 0.5% contraction expected in autumn.
These are quite outstanding outturns, proving the remarkable resilience of the EU economy to the headwinds unleashed by Russia’s war against Ukraine and in particular the energy crisis. For 2022, growth in the EU and the euro area is estimated at 3.5%, a higher rate than recorded by either the US or China.
In 2023, growth is still expected to slow down, on the back of powerful headwinds. Wage developments are expected to remain below inflation in the short term, constraining consumption.
Also, the cumulative impact of past monetary tightening is starting to weigh on lending activity, while the cycle of interest rate hikes is not yet over. On the positive side, falling wholesale gas prices are set to benefit consumption, as they progressively pass through to consumer prices.
Overall, the growth forecast for 2023 has been revised up to 0.8% in the EU and 0.9% in the euro area.
For 2024, GDP growth is expected at 1.6% in the EU and 1.5% in the euro area, unchanged compared to the Autumn Forecast.
The Commission’s economic sentiment indicator for the EU has been steadily improving since November. The improvement is notable in services, whereas confidence in the construction sector worsened at the turn of the year.
A similar message emerges from the Purchasing Managers Indices. In January, the euro area composite flash PMI increased for a third consecutive month, returning into expansion territory for the first time since June 2022.
Overall, these survey indicators suggest that the EU economy will avoid a contraction also in the first quarter.
The European gas benchmark price has fallen well below its pre-war level, helped by lower consumption and continued diversification of supply sources. At end-January, the TTF gas benchmark traded at 55 EUR/MWh.
At the cut-off date of the forecast, which was 1 February, futures on the TTF were trading within a narrow range of 55-70 EUR/MWh over the forecast horizon. This is substantially lower than in autumn, though still more than three times higher than in 2019.
With hindsight, the resilience of EU households and corporations has been impressive. From January to November 2022, consumption of natural gas in the EU was consistently below the 2017-2021 average, with consumption in October and November falling 25% below the 2017-2021 average, therefore overachieving the reduction target agreed at EU level.
The picture for non-energy commodities is more mixed. Prices of agricultural commodities have come down from previous highs, while those of industrial metals moved up again after a long downward adjustment. This could reflect expectations of resuming construction activity in China.
Global growth has picked up somewhat in the third quarter of last year after stagnating in the first half of 2022. Survey indicators such as global PMIs suggest that the growth momentum has weakened but do not indicate a rapid global slowdown.
For 2023 as a whole, advanced economies as well as most emerging markets are expected to see a slowdown. In China though, growth prospects beyond the short term have improved following the U-turn in COVID-19 policy towards a broad reopening.
Overall, the outlook for global growth has improved only marginally since Autumn. Global growth (excluding the EU) is now expected to be around 3.1% in 2022, 3.0% in 2023 and 3.3% in 2024.
Trade growth is set to moderate, particularly during 2023, amidst weaker external demand. Global import volume growth excluding the EU is expected to slow down to 2.4% in 2023 before recovering to 3.6% in 2024.
Thus, the support to the EU economy from global demand is set to remain subdued, particularly this year.
Employment continued to grow up to the third quarter of last year, though at a gradually lower pace. Meanwhile, unemployment in December 2022 remained unchanged at 6.1% in the EU and 6.6% in the euro area.
The labour market is expected to remain tight in 2023 and 2024. The high level of labour shortages and job vacancy rates can be expected to motivate firms to hoard labour in the face of a temporary slowdown. With growth picking up later in 2023 and in 2024, an increase in the number of hours worked should be followed by increased headcount employment.
Despite the dynamism of EU labour markets, nominal wage growth continued at rates below inflation last year, resulting in further purchasing power losses of employees. This year and in 2024 though, nominal wage growth is expected to pick up more forcefully. Several Member States have increased minimum wages while recruiting difficulties by corporations are likely to exert upward pressures in wage negotiations.
Global financial conditions have eased somewhat, and the US dollar has weakened since Autumn.
Central banks have continued tightening monetary policy in response to high inflation, but the expected pace of interest rates hikes beyond the near term has eased somewhat compared with Autumn.
Markets expect rates to peak in the middle of this year before gradually declining towards the end of next year.
The effects of the ongoing ECB tightening are becoming visible. Financing costs for euro area households and corporations have risen sharply throughout 2022 while bank lending growth has initiated a sharp deceleration, first for households and more recently for corporations.
Turning to the growth map:
In Germany, GDP is expected to increase by 0.2% this year while in autumn, it was projected to contract by 0.6%. This is a significant turnaround driven by abating energy prices, gradual adjustment of supply chains and policy support to households and firms. In 2024, growth is expected to rebound to 1.3%, broadly in line with the autumn projections.
In France, annual growth is expected to reach 0.6% in 2023, a slight upward revision of 0.2 percentage points since autumn. After a weak start to the year, the French economy is projected to recover in the second half, driven by both consumption and investment. The positive momentum is set to continue in 2024 with a growth rate of 1.4%, broadly unchanged since autumn.
In Italy, growth contracted marginally in the last quarter of 2022 but it is expected to gradually recover this year and avoid a technical recession. For the 2023, real GDP is set to grow by 0.8% on the back of private demand but also thanks to the public investment projects included in the country’s RRP. The GDP outlook for 2024 remains virtually unchanged from the autumn with growth expected at 1.0%.
In Spain, the economy weathered relatively well the negative shocks unleashed by the war, expanding by 5.5% in 2022, 1.0 percentage point more than expected in autumn. Tourism was an important driver for economic activity last year and is expected to remain so this year and next. The Spanish economy is projected to continue performing well with growth set to reach 1.4% in 2023 and 2.0% in 2024.
Finally, in Poland, the economy continued on a strong growth path in 2022 despite significant headwinds. Strong revisions of historical data lifted the real GDP growth projection in 2022 to 4.9%, 0.9 pps. higher than in the Autumn Forecast. Yet momentum weakened visibly at the turn of the year, which should weigh on growth this year. Declining real incomes will likely put downward pressure on private consumption. After decelerating to 0.4% in 2023, GDP growth is expected to bounce back to 2.5% in 2024.
As you can see from this map, heterogeneity across Member States remains elevated in terms of growth performance. This was already visible over the autumn, fuelled by different degrees of adaptation and response to the energy crisis.
Inflation peaked during the last quarter of 2022, as expected in the Autumn Forecast. Thanks to rapidly declining energy prices, euro area headline inflation averaged 10% in the final quarter of last year, a somewhat lower turnout than expected.
However, core inflation, which is headline inflation excluding energy and unprocessed food, continued to increase to 6.9% in December, implying a slightly higher outcome for the fourth quarter than projected in Autumn.
The most recent inflation flash estimates for January confirm the trends observed in the last months of 2022: headline inflation is trending lower while core inflation is still slightly increasing.
During 2023 and 2024, inflation is set to decelerate at a somewhat quicker pace than expected in Autumn. The recent substantial declines in wholesale energy prices have still to pass through to retail prices while a stronger euro and tighter financing conditions are set to exert further downward pressure on inflation.
It is worth mentioning though that the pass-through from wholesale gas and electricity prices to retail prices is set to be mitigated by the planned withdrawal of the national policy measures to limit the impact of high energy prices.
Overall, inflation in the euro area is projected to decline from 8.4% in 2022 to 5.6% in 2023 and 2.5% in 2024. This represents a downward revision of 0.5 pps. and 0.1 pps. in 2023 and 2024 compared to the Autumn Forecast.
Recent inflation readings and the inflation outlook for the next two years differ widely across Member States.
This year, inflation is expected to remain stubbornly high in eastern, mostly non-euro area Member States.
Next year, inflation is set to moderate across the EU but with eastern countries still set to record higher inflation rates than the rest of the EU.
Risks to the growth outlook appear broadly balanced, whereas last autumn they were tilted to the downside, although uncertainty surrounding the forecast remains high.
Domestic demand could turn out higher than projected if the recent declines in wholesale gas prices pass through to consumer prices more strongly and consumption proves more resilient. Nonetheless, a potential reversal of those declines cannot be ruled out in the context of the ongoing war and broader geopolitical tensions.
External demand could turn out to be more robust following China’s re-opening – which could, however, fuel global inflation.
Especially in 2024, upside risks to inflation prevail, as price pressures may turn out broader and more entrenched than expected if wage growth were to settle at above-average rates for a sustained period.
Lastly, the adjustment to higher interest rates could prove challenging, particularly for highly indebted corporations and for households with variable mortgage rates.
To sum up, the EU economy showed remarkable strength last year and the performance this year is set to be better than expected last autumn.
Better than expected doesn’t mean good and the outlook is of course policy-dependent. The resilience and adaptability of EU households and corporations to the energy crisis has played an important role here, but the better picture also reflects the strength of the common response to the shocks experienced since 2020.
Yet Europeans still face a difficult period ahead, with growth still expected to slow and inflation set to relinquish its grip on purchasing power only gradually.
And that’s why we must show the same resolve and ambition as we did over the past three years when it comes to tackling with common responses the challenges we face today.
