EU reduces growth forecast for 2024 and predicts slowdown in inflation

The European Commission reduced this Thursday (15) the Eurozone's economic growth forecast for 2024, to 0.8%, and announced a forecast for a more significant slowdown in inflation than expected.

The Commission's autumn projections (northern hemisphere, spring in Brazil) indicated growth of 1.2% in the euro zone in 2024, but the bloc's poor performance at the end of 2023 and the beginning of the year led to a cut of 0.4 percentage point.

According to the Commission document, “the broad stagnation of the EU economy throughout 2023 turned into fragile momentum at the start of the new year.”

The Commission recalled that “the EU economy narrowly escaped a technical recession in the second half of 2023 and, at the end of the year, real GDP was broadly at the same level as in the third quarter of 2022”.

However, the Commission highlighted that the trend will be accompanied by a “faster than expected” contraction in inflation.

In the previous report, the Commission had projected inflation of 3.2% for 2024, but has now reduced the forecast to 2.7%, a trajectory that should continue to 2.2% at the end of 2025.

“A decline in the prices of energy raw materials and a weakened economic stimulus led to a more pronounced downward trajectory for inflation than expected,” said European Commissioner for the Economy, Paolo Gentiloni.

Commission analysts highlighted that the end of support measures for the energy sector and commercial disruptions in the Red Sea “will have some influence on the increase in prices”.

However, the report highlights, the trend will not be strong enough to “alter the process of falling inflation”.

– Role of the ECB –

The inflation trajectory opens up prospects for a reduction in basic interest rates that were raised by the European Central Bank (ECB) to control price adjustments.

The Commission recalled that in the 15 months between July 2022 and September 2023, the ECB increased interest rates to 4.50%.

“This was the fastest adjustment cycle in the history of the eurozone,” the Commission said.

“For this reason, financial markets expect the ECB to start cutting rates more sharply than predicted at the end of last year.”

Among the main EU economies, the Commission projects that Germany should end the year with a modest increase of 0.3% of GDP.

The European Commission's previous forecast, released in November, was growth of 0.8% for the German economy.

Italy should register a GDP increase of 0.7%, France should grow 0.9% and Spain 1.7%, according to the Commission.

The scenario must be considered in the context of geopolitical uncertainties and tensions, in particular the risk of an expansion of the conflict in the Middle East.

“We expect the increase in transport costs due to trade disruptions in the Red Sea to have only a marginal impact on inflation,” the report states.

The text, however, adds that the scenario “could result in new supply problems, which in turn could suffocate production and cause price increases”.

Gentiloni also mentioned that “surprises in China’s economic growth” and “higher interest rates in the United States could worsen global financial conditions.”