EC – European Economic Forecast Autumn, 2023

The European economy has faced numerous challenges in the past four years, starting with the COVID-19 pandemic and followed by global supply disruptions. Energy prices, particularly for natural gas and electricity, started to rise faster than demand, leading to high inflation. Russia's aggression against Ukraine further increased gas prices and had ripple effects on electricity prices. Despite these shocks, the EU economy showed resilience and rebounded strongly in 2021 and 2022, with EU output reaching 3.3% higher than pre-pandemic levels. However, economic growth has slowed down in 2023, with real GDP barely growing in the first three quarters. This has led to a downward revision of projected growth for the year. Several factors have contributed to this slowdown, including disappointing growth in China, geopolitical tensions, high energy prices, and domestic challenges such as high inflation and tightening financing conditions. These factors have weighed on confidence, consumption, and investment. Despite these challenges, there are elements of resilience that can support a gradual resumption of growth. The EU labor market has remained strong, job growth and wage growth are expected to continue, and inflation is declining. This will contribute to stronger consumption growth. Strong corporate balance sheets provide room for business transformation and capacity adjustment for energy-saving and low-emission production. Additionally, the implementation of reforms and investments under the Recovery and Resilience Facility will support the green and digital transitions. However, there are uncertainties, including the economic impact of Russia's aggression against Ukraine and the potential escalation of the conflict in the Middle East. The forecast also assumes an orderly adjustment in financial markets due to tighter monetary policy, with limited effects on bankruptcies and households' repayment capacity.