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EU economy poised to avoid recession, but challenges still exist

According to the European Commission’s Winter 2023 Economic Forecast, which was released on Monday, both the European Union (EU) and the eurozone should narrowly avoid a technical recession.

The document, which was delivered by Paolo Gentiloni, European Commissioner for Economy, raises the growth projection for 2023 to 0.8 percent for the EU and 0.9 percent for the eurozone. This is 0.5 and 0.6 percentage points greater than what was predicted for the autumn.

According to the Commission, “both areas are now expected to narrowly avoid the technical recession that was anticipated for the turn of the year.”

According to Gentiloni, the growth rate for the EU and the eurozone in 2022 is predicted to be 3.5 percent.

Since October, positive events have included a sharp decline in gas prices as well as a robust labor market, which have both helped boost the growth prognosis for 2023.

Because of a decline in demand, the mild weather, and the diversification of gas supplies, he added, the European gas benchmark price has dropped below the level it was prior to the Russia-Ukraine conflict.

According to Gentiloni, futures on the TTF (Title Transfer Facility) were trading in a constrained range of 55-70 euros per megawatt-hour over the forecast horizon as of the forecast’s cut-off date on February 1. While this is significantly below autumn levels, it is still more than three times higher than in 2019.

With consumption in October and November 25 percent below the average for 2017–2021, European families and businesses also made a significant part in exceeding the EU’s aim for gas consumption reduction.

The job market is still robust, and by the end of 2022, the unemployment rate will still be at an all-time low of 6.1 percent.

According to projections, headline inflation in the EU will decrease from 9.2 percent in 2022 to 6.4 percent in 2023 before settling at 2.8 percent in 2024.

Similar trends are anticipated for inflation in the eurozone, which could decrease from 8.4% percent last year to 5.6 percent this year and 2.5 percent next year.

Forecasters warn that strong headwinds will persist. The cost of energy is still very high for both consumers and businesses, and core inflation was still growing in January, further reducing the purchasing power of households.

As long as there are inflationary pressures, the monetary system will continue to tighten, which will have a negative impact on investment and commercial activity.

Inflation risks continue to be closely related to market movements, matching some of the highlighted growth risks. Upside risks to inflation will predominate, especially in 2024, as price pressures could end up being wider and more persistent than anticipated if wage growth were to settle at above-average rates for an extended length of time.

Although the situation is less dire than anticipated, we still don’t have a more optimistic picture overall, according to Gentiloni.

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