Forecast drops again
Germany drags down Eurozone growth
November 15, 2023, 4:45 p.m
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The eurozone’s recovery will not be as fast as the European Commission had predicted. The reasons are varied. However, not all EU states are affected equally. Growth in Germany will be well below average.
According to a forecast by the European Commission, the EU economy will grow more slowly this year than recently expected. The authority expects growth of 0.6 percent each for the EU and the euro zone, according to an estimate. This means she is lowering her forecast for the second time in a row. In September, the commission had assumed an increase of 0.8 percent. According to the Commission’s expectations, the German economy is below average.
“This has been a challenging year for the EU economy, hit by the impact of Russia’s war in Ukraine, weak global demand and higher consumer prices,” said Commission Vice President Valdis Dombrovskis. After very weak growth this year, a slight recovery is expected in 2024, supported by a strong labor market and a further weakening of inflation.
Annual inflation in the euro zone will fall from 5.6 percent in 2023 to 3.2 percent in 2024, according to the Commission’s estimate, while inflation in the EU is expected to fall from 6.5 percent this year to 3.5 percent next. In terms of economic growth, the authority expects an increase of 1.3 percent in the international community in 2024 – but here too it has decreased compared to the previous forecast (1.4). The authority estimates the increase in the euro zone in 2024 to be 1.2 percent (previously 1.3). For 2025, it forecasts growth of 1.7 percent in the EU (Eurozone: 1.6).
Geopolitics is massively unsettling
EU Economic Commissioner Paolo Gentiloni said the spreading conflict in the Middle East had so far had only limited economic impact outside the region. “But rising geopolitical tensions have further increased uncertainty and risk clouding the outlook.” There could also continue to be disruptions due to the protracted Russian war of aggression against Ukraine. The economic developments of the EU’s most important trading partners, particularly China, could also pose risks, the Commission said.
At the same time, the tighter monetary policy in Europe could have a further impact on companies and households than expected. In addition, climate change caused more frequent extreme weather events such as heat waves, fires, droughts and floods to impact the economy.
According to estimates, the economy in Germany will shrink by 0.3 percent this year. In September, a decline of 0.4 percent was forecast for the EU’s largest economy. The authority now expects the German economy to grow by 0.8 percent in 2024 (previously 1.1), and 1.2 percent in 2025. This means that Germany remains below the expected average in the Eurozone.
However, with an estimated increase in GDP of 0.8 percent, Germany will, together with Finland, be at the bottom of the Eurozone in this respect in 2024. Looking at the largest economies in the common currency area, France with GDP growth of 1.2 percent and Spain with 1.7 percent will do better according to the forecast. Italy, which has long been considered to have chronically weak growth, is also expected to do better than Germany with a GDP increase of 0.9 percent.
The energy crisis is hitting Germany particularly hard
As recently as September, Gentiloni emphasized that, despite this year’s recession, he did not see Germany as the “sick man of Europe.” The German economy is strong and will recover, he emphasized at the time. However, it suffered particularly badly from the energy crisis as a result of Russia’s war of aggression on Ukraine and from weak exports.
The Commission sees the cause as a loss of purchasing power due to high inflation, and the tightening of financing conditions also put a strain on consumption and investments. In addition, foreign demand has developed less favorably than previously assumed, which is leading to a worsening trade outlook. “In the future, however, domestic demand is likely to pick up again, driven by an increase in real wages,” it said. The “economic wise men” recently expected German economic output to decline by 0.4 percent this year. This means they are significantly more pessimistic than they were in the spring. Both the federal government and the leading economic research institutes had recently lowered their forecasts, some significantly. They also expect a decline of 0.4 to 0.6 percent.
In their report, the economists made it clear that they saw a need for reform in order to increase the growth potential of the largest economy in the euro zone. Leverage should be applied particularly when it comes to investments. The government advisors led by Munich economist Monika Schnitzer had forecast a recession this year and only a cautious recovery for 2024.
MEP Markus Ferber called many of the problems homemade. “There needs to be a 180-degree turnaround in European economic policy,” he explained in Brussels. The package announced by the EU Commission to reduce bureaucracy can only be the first step. Europe needs a policy for competitiveness, growth and employment.