In 2023 a recession is increasingly likely

The European economy continues to prove resilient in a challenging global environment. Falling energy prices, easing supply bottlenecks, and a robust labor market supported moderate growth in the first quarter of 2023, allaying recession fears.

The European economy continues to prove resilient in a challenging global environment. Falling energy prices, easing supply bottlenecks, and a robust labor market supported moderate growth in the first quarter of 2023, allaying recession fears. This better-than-expected start to the year lift the EU economy’s growth prospects to 1.0% in 2023 (0.8% in the winter interim forecast) and 1.7% in 2024 (1 .6% in the winter forecast). The upward revisions for the euro area are of similar magnitude, with GDP growth currently projected at 1.1% in 2023 and 1.6% in 2024. On the back of ongoing underlying price pressures, even inflation has been revised upwards from the winter forecast in the euro area to 5.8% in 2023 and 2.8% in 2024.

Falling energy prices improve growth prospects According to Eurostat’s preliminary flash estimate, GDP grew by 0.3% in the EU and by 0.1% in the euro area in the first quarter of 2023. According to leading indicators, growth is expected to continue into the second quarter.

The European economy has managed to contain the negative impact of Russia’s war of aggression against Ukraine, coping with the energy crisis thanks to a rapid diversification of supplies and a considerable drop in gas consumption. The markedly lower energy prices are being passed on to the economy, reducing the production costs of companies. Consumers are also reporting lower energy bills, but private consumption is set to remain subdued as wage growth remains below inflation. As inflation remains high, financing conditions are set to tighten further. While the ECB and other EU central banks are expected to be nearing the end of their interest rate hike cycle, the recent turmoil in the financial sector could increase pressures on the cost of money and ease of access to credit, slowing down the growth of investment and particularly affecting those in residential construction.