The European Union raised its growth forecasts for this year, while forecasting a “modest contraction” in the size of the British economy.
The European Commission’s spring forecast raised the EU’s growth forecast to 1 percent, from 0.8 percent in February, with inflation still the biggest risk to the economy.
In contrast to European economies, Britain is expected to experience a contraction of 0.2 percent this year. It is estimated that it will continue to lag behind the European economies in 2024 with a growth of 1 percent compared to 1.7 percent.
“The British economy is expected to experience a modest contraction in 2023, as real household income continues to decline and consumption and external demand decline, while business investment remains weak,” the forecast from Brussels said. A moderate recovery is expected in 2024, as inflation continues to ease, employment increases and real wages rise boost household real incomes.
Paolo Gentiloni, Commissioner for Economics of the European Union, said: “The European economy is in better shape than we expected. Thanks to relentless efforts to strengthen our energy security, a remarkably flexible labor market and an easing of supply constraints, we have avoided a winter recession and are preparing for moderate growth this year and next.”
Gentiloni warned that while lower-than-expected energy prices following Russia’s invasion of Ukraine have raised growth expectations, “downside risks to the economic outlook have increased”, particularly due to core inflation.
The stakes are still too plentiful for comfort, and Russia’s brutal invasion of Ukraine continues to cast uncertainty over the outlook. We must remain vigilant – and ready to respond to any future shocks.
In a sign of concern, inflation expectations in the eurozone have also been revised upwards and are now expected to come in at 5.8 percent in 2023 compared to 5.6 percent in February.
“As inflation continues to rise, financing conditions are set to further tighten,” the forecast said.
“Although the ECB and other EU central banks are expected to be nearing the end of their rate-raising cycle, the recent turmoil in the financial sector is likely to add pressure on cost and access to credit, slowing investment growth. Particularly hit in residential investment.
The committee urged governments to cut back on spending, and warned that “an expansionary fiscal policy stance would increase inflation.”
“In addition, new challenges to the global economy may emerge in the wake of banking sector turmoil or associated with broader geopolitical tensions,” the forecast said.
Brussels’ more optimistic forecast came as March figures showed a sharp decline in industrial production in the eurozone with a contraction of 4.1 percent in capital goods output, resulting in a 1.4 percent year-on-year decline.