Summer 2023 Economic Forecast: Easing growth momentum amid declining inflation and robust labour market

This article is brought to you in association with the European Commission.

The European Commission has today presented the Summer 2023 Economic Forecast.

The EU economy continues to grow, albeit with reduced momentum. The forecast revises growth in the EU economy down to 0.8% in 2023, from 1% projected in the Spring Forecast, and 1.4% in 2024, from 1.7%. It also revises growth in the euro area down to 0.8% in 2023 (from 1.1%) and 1.3% in 2024 (from 1.6%).

Inflation is expected to continue to decline over the forecast horizon. Harmonised index of consumer prices (HICP) inflation is now projected to reach 6.5% in 2023 (compared to 6.7% in the spring) and 3.2% in 2024 (compared to 3.1%) in the EU. In the euro area, inflation is forecast to be 5.6% in 2023 (compared to 5.8%) and 2.9% in 2024 (compared to 2.8%).

A reduced growth momentum

Latest data confirm that economic activity in the EU was subdued in the first half of 2023 on the back of the formidable shocks that the EU has endured. Weakness in domestic demand, in particular consumption, shows that high and still increasing consumer prices for most goods and services are taking a heavier toll than expected in the Spring Forecast. This is despite declining energy prices and an exceptionally strong labour market, which has seen record low unemployment rates, continued expansion of employment, and rising wages. Meanwhile, the sharp slowdown in the provision of bank credit to the economy shows that monetary policy tightening is working its way through the economy. Survey indicators now point to slowing economic activity in the summer and the months ahead, with continued weakness in industry and fading momentum in services, despite a strong tourism season in many parts of Europe.

The global economy has fared somewhat better than anticipated in the first half of the year, despite a weak performance in China. However, the outlook for global growth and trade remains broadly unchanged compared to spring, implying that the EU economy cannot count on strong support from external demand.

Overall, the weaker growth momentum in the EU is expected to extend to 2024, and the impact of tight monetary policy is set to continue restraining economic activity. However, a mild rebound in growth is projected next year, as inflation keeps easing, the labour market remains robust, and real incomes gradually recover.

Inflation to further decline

Inflation continued easing in the first half of 2023 as a result of declining energy prices and moderating inflationary pressures from food and industrial goods. In the euro area, it reached 5.3% in July, exactly half of the peak level of 10.6% recorded in October 2022, and remained stable in August. 

Energy prices are set to continue declining for the remainder of 2023, but at a slowing pace. They are projected to increase slightly again in 2024, driven by higher oil prices. Inflation in services has so far been more persistent than previously expected, but it is set to continue moderating as demand softens under the impact of monetary policy tightening and a fading post-COVID boost. The prices of food and non-energy industrial goods will continue contributing to easing inflation over the forecast horizon, also reflecting lower input prices and normalising supply chains.

An outlook challenged by risks and uncertainty

Russia’s ongoing war of aggression against Ukraine and wider geopolitical tensions continue to pose risks and remain a source of uncertainty. Furthermore, monetary tightening may weigh on economic activity more heavily than expected, but could also lead to a faster decline in inflation that would accelerate the restoration of real incomes. By contrast, price pressures could turn out more persistent.

Mounting climate risks, illustrated by the extreme weather conditions and unprecedented wildfires and floods in the summer, also weigh on the outlook.

Background

The Summer 2023 Economic Forecast provides an update of the Spring 2023 Economic Forecast, which was presented in May 2023.

This is an interim forecast, containing GDP and inflation projections for the six largest EU Member State economies, the euro area and the EU as a whole. The latest economic developments for 21 other Member States are addressed in the overall analysis and are factored into the calculation of the EU and euro area aggregates.

The Summer Forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 30 August 2023. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 7 September 2023.

The Commission publishes two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) each year. The 2023 edition of the summer forecast is being presented later than on previous occasions to enable it to incorporate several key data releases in July and August.

The Commission’s next forecast will be the Autumn 2023 Economic Forecast. This is scheduled to be published in November 2023.