European Economy Shows Resilience with Improved Growth Outlook Amid Challenges in Spring 2023 Forecast

The latest economic forecast for Spring 2023 indicates an improved outlook for the European economy amid persistent challenges. Despite the ongoing energy crisis, the EU has shown resilience in a challenging global context, and GDP grew by 0.3% in the first quarter of the year. The growth outlook for the EU economy has been lifted to 1.0% in 2023 and 1.7% in 2024, and the euro area’s GDP growth is expected to be 1.1% and 1.6% in 2023 and 2024 respectively. However, persisting core price pressures have led to an upward revision of inflation to 5.8% in 2023 and 2.8% in 2024 in the euro area. Financing conditions are expected to tighten further, slowing down investment growth and hitting residential investment in particular. The labour market, however, remains resilient against economic slowdown, and the unemployment rate is projected to remain just above 6%. Despite the introduction of support measures, strong nominal growth and the unwinding of residual pandemic-related measures have led the EU aggregate government deficit to fall further to 3.4% of GDP. The EU aggregate debt-to-GDP ratio is projected to decline steadily to below 83% in 2024. The forecast indicates that more persistent core inflation could restrain the purchasing power of households, force a stronger response of monetary policy, and lead to macro-financial ramifications. The ongoing uncertainty stemming from Russia’s ongoing invasion of Ukraine remains a persistent risk.