Unlock Editor’s Digest for free
Roula Khalaf, FT Editor, picks her favorite stories in this weekly newsletter.
Inflation in the euro zone will fall faster than previously expected this year as the impact of Red Sea trade disruptions proves milder than expected, according to updated EU estimates.
The European Commission said on Wednesday that annual inflation in the single currency bloc will fall to 2.5% this year, before reaching the European Central Bank’s 2% target in the second half of 2025.
In its previous forecast in February, the committee expected a gradual decline to 2.7% in 2024 and 2.2% next year.
“An acceleration [in economic activity] ongoing, in an environment where inflation is falling, so we expect private consumption to pick up and the labor market situation to remain quite strong,” EU economics commissioner Paolo Gentiloni said on Thursday. Two.
The committee maintained its previous forecast for the currency bloc to grow 0.8% this year, before reaching 1.4% in 2025. Last year, growth was 0.4%.
Gentiloni warned growth growth was “very moderate” and there were downside risks related to the “uncertain, dangerous” geopolitical environment.
The Eurozone economy showed signs of a temporary recovery in the first three months of this year as gross domestic product increased 0.3% from the previous quarter, boosted by higher exports, rising tourism and consumer spending. increased after inflation decreased.
Economic growth is expected to continue rising this year and in 2025, especially as the European Central Bank is widely expected to start cutting interest rates from next month and inflation is expected forecast to fall further while wages continue to rise – boosting household spending power.
However, the European economy recovered more slowly than other regions after the impact of the pandemic and was more severely affected by the consequences of Russia’s invasion of Ukraine. Growth in the region is expected to remain weaker than in the US and China.
Many European countries are still facing weak productivity – output per hour worked – as well as low levels of investment, high energy costs, aging populations, shrinking workforces and reduced working hours.
Germany, whose economy shrank 0.3% last year, is expected to grow 0.1% this year. Nine other EU countries experiencing recessions in 2023 are predicted to return to positive territory. Only Estonia is expected to fall another 0.5%.
The EU as a whole, including non-euro zone countries, is expected to grow 1% this year, up 0.1% from the previous estimate. Growth in the bloc is expected to reach 1.6% next year.
Fiscal policy is also weighing on European growth as many governments in the region are cutting spending in response to the EU’s reimposition of fiscal rules to limit budget deficits and debt levels. from this year.
“Europe is not just gloomy, recovery is on the horizon,” said Alfred Kammer, IMF European director. “However, there are challenges and there is no room for complacency,” he said, adding that growth in the Eurozone would remain “insufficient”.
The IMF has called on Europe to remove barriers to internal trade between EU countries and increase integration of the bloc’s capital markets to increase funding for high-growth companies and make investments. needed in green energy, defense and digitalization.
ECB executive board member Isabel Schnabel told an event organized by the German chancellor’s office in Berlin that the euro zone’s “increasingly poor” ability to generate sustainable growth was hindering its competitiveness. international of this region.
Warning that “a clear gap has opened up in real IT-related capital between the Eurozone and the US”, Schnabel called for “measures to increase competition, reduce bureaucracy and promote greater integration commodity, labor and financial markets”.
