EU wants to avoid recession after falling gas prices, says Brussels

According to the European Commission, the EU will dodge a previously forecast recession as falling gas prices, supportive government policies and solid fiscal spending improve the region’s prospects.

Brussels raised its forecast for EU growth this year to 0.8 percent, stronger than November’s 0.3 percent forecast, and said the region will avoid a technical recession – defined as two consecutive quarters of economic contraction . The euro area is forecast to grow by 0.9 percent in 2023, better than the 0.3 percent the commission had expected late last year.

The upgrades bring the commission in line with analysts now predicting the region will dodge a recession after forecasting a sharp contraction in the second half of 2022.

The specter of Russian gas supply shutdowns, coupled with falling industrial production and flagging business sentiment, fueled fears last fall that the EU was heading for a deep recession.

However, a mild winter and government subsidies have also helped ease the pressure on households and businesses as the European benchmark gas price fell well below levels recorded in summer 2022.

The region’s economy avoided a slowdown in the last quarter of last year – partly thanks to strong growth numbers for Ireland.

According to the EU’s Copernicus Climate Change Service, Europe experienced the third warmest January on record. Levels in the block’s underground gas storage facilities have remained unusually high for this time of year – the facilities are currently operating at 66 per cent – raising hopes that the EU should be in less of a rush to refill storage before next winter.

Prospects have also improved overseas, including in China, where the easing of Covid-19 lockdown measures had led to a positive reassessment of growth prospects, the commission said, along with fewer supply chain disruptions.

“We started 2023 on a better footing than expected: the risks of recession and gas shortages have receded and unemployment remains at record lows,” said EU Economic Commissioner Paolo Gentiloni.

“Nevertheless, there are still difficult times ahead for Europeans. Growth is still expected to slow due to strong headwinds and inflation to lose purchasing power only gradually in the coming quarters.”

Growth this year would be significantly slower than the 3.5 percent recorded for the EU and euro area in 2022, the commission said, warning that strong “headwinds” would continue to weigh on the outlook.

Brussels also said inflation had peaked and forecast consumer prices would rise 6.4 percent this year in the EU, compared to 9.2 percent last year. Inflation in the euro area is expected to ease this year from 8.4 percent in 2022 to 5.6 percent. Inflation in the single currency area is forecast to fall further to 2.5 percent in 2024.

Real wages would fall further in the short term amid high price hikes, Brussels said, noting that core inflation, which excludes energy and unprocessed food, rose further in January.

Higher official interest rates would weigh on credit flows and investment, the commission added. The European Central Bank hiked interest rates to 2.5 percent earlier this month, signaling another half-point hike in March.

Germany’s central bank governor Joachim Nagel, who is a member of the European Central Bank’s Interest Rate Council, warned this month of the “great risk” that inflation could remain too high if it halted rate hikes too soon.

The risks to growth prospects are “broadly balanced,” Gentiloni said at a news conference in Brussels on Monday. The main risk looking ahead, he added, is “aggressive war in Ukraine and geopolitical tensions.” However, he stressed that it was “really impressive” that Europe had been able to overcome its energy dependency on Russia.

Additional reporting by Alice Hancock in Brussels