After a strong first half of the year, the European Commission says the EU economy has now entered a “much more challenging phase.”
The shocks unleashed by Russia’s war of aggression against Ukraine are denting global demand and reinforcing global inflationary pressures, it says.
The EU is among the most exposed advanced economies, due to its geographical proximity to the war and heavy reliance on gas imports from Russia.
The energy crisis is eroding households’ purchasing power and weighing on production. Economic sentiment has fallen markedly.
As a result, although growth in 2022 is set to be better than previously forecast, the outlook for 2023 is significantly weaker for growth and higher for inflation compared to the European Commission’s Summer interim Forecast.
Real GDP growth in the EU surprised on the upside in the first half of 2022, as consumers vigorously resumed spending, particularly on services, following the easing of COVID-19 containment measures. The expansion continued in the third quarter, though at a considerably weaker pace.
Amid elevated uncertainty, high energy price pressures, erosion of households’ purchasing power, a weaker external environment and tighter financing conditions are expected to tip the EU, the euro area and most Member States into recession in the last quarter of the year.
As inflation keeps cutting into households’ disposable incomes, the contraction of economic activity is set to continue in the first quarter of 2023. Growth is expected to return to Europe in spring, as inflation gradually relaxes its grip on the economy.
However, with powerful headwinds still holding back demand, economic activity is set to be subdued, with GDP growth reaching 0.3% in 2023 as a whole in both the EU and the euro area.
By 2024, economic growth is forecast to progressively regain traction, averaging 1.6% in the EU and 1.5% in the euro area.
Despite the challenging environment, the labour market has continued performing strongly, with employment and participation at their highest and unemployment at its lowest in decades. The forceful economic expansion pulled a net additional two million people into employment in the first half of 2022, raising the number of employed persons in the EU to an all-time high of 213.4 million. The unemployment rate remained at a record-low of 6.0% in September.
Labour markets are expected to react to the slowing of economic activity with a lag, but to remain resilient. Employment growth in the EU is forecast at 1.8% in 2022, before coming to a standstill in 2023 and moderately edging up to 0.4% in 2024.
Unemployment rates in the EU are projected at 6.2% in 2022, 6.5% in 2023, and 6.4% in 2024.