Germany is struggling economically, weighed down by its industry. The European Commission has reduced its economic growth forecast for the euro zone in 2023 and 2024 by 0.3 points, to 0.8% and 1.3% respectively. Brussels is now counting on a decline in gross domestic product (GDP) of 0.4% this year in Europe’s largest economy, before a rebound of 1.1% next year, against +0.2% and +1.4 % expected so far.
Germany is suffering from the weakness of its exports and its vast industrial sector, its traditional strengths. Confidence indicators in industry have been falling since the start of the year, particularly in energy-intensive sectors, “hard hit by the energy price shock” linked to the war in Ukraine, underlined Monday the European executive.
“A strong economy that has the tools to recover”
The German economy is also penalized by the fall in household purchasing power, which is affecting consumption. “But the situation could improve in the coming months” and help the return of growth, said the European Commissioner for the Economy, Paolo Gentiloni, during a press conference.
He acknowledged that the country was facing “structural” difficulties which would only find a solution in the “medium term”. However, “it is a strong economy which has the tools to recover”, he added, rejecting the expression “sick man of Europe” which recently appeared in several media. All in all, growth continues in the euro zone and in the EU, but at a slower pace than expected.
France does better than expected
For all 27 member countries, Brussels is now counting on 0.8% growth in 2023 and 1.4% in 2024, respectively 0.2 points and 0.3 points less compared to the latest forecasts published on 15 may. For Italy, the increase in GDP should be limited to 0.9% in 2023 (-0.3 points). Conversely, France should do better than expected, thanks to a strong rebound in the spring. The growth of the second European economy has been revised upwards to 1% this year (+0.3 points). Same thing for Spain expected at 2.2% (+0.3 points).
Inflation continues to slow. Brussels now anticipates an average increase in consumer prices of 5.6% in 2023 (-0.2 points, compared to the latest forecasts in May) and 2.9% in 2024 (+0.1 points). These figures remain significantly higher than the 2% objective defined by the European Central Bank (ECB). “The multiple headwinds that our economies are facing this year have led to weaker growth dynamics than we had anticipated in the spring,” acknowledged Paolo Gentiloni, highlighting the impact of the war in Ukraine.
War and interest rates
“Russia’s brutal war against Ukraine continues to cause not only human suffering, but also economic disruption,” he said. The European Commission notes that “economic activity in the EU was weak during the first half of the year”, particularly in the consumer sector, a sign that high prices “weigh more heavily than expected”, despite the exceptional strength labor market which has recorded record unemployment rates.
The Commission also stresses the impact of the interest rate hikes decided by the ECB. The strong monetary tightening implemented to combat inflation results in a “clear slowdown in the granting of bank loans”, mechanically reducing the investment capacities of businesses and households. The latest indicators “suggest a slowdown in economic activity during the summer and in the months to come, with persistent weakness in industry and a loss of speed in services, despite a strong tourist season in many many regions of Europe”, summarizes the Brussels executive.