Paolo Gentiloni did his best to spread optimism. But it could not be overlooked that the EU Economic Commissioner is finding it increasingly difficult to interpret the situation positively. Somehow to talk about the fact that things could look better tomorrow, that Europe can foreseeably grow out of its crises and be able to compensate for the losses in prosperity and purchasing power caused by war and inflation. “The conditions for an upswing continue to exist,” Gentiloni said simply when he spoke in Brussels on Thursday Winter economic forecast from the EU Commission introduced.
Which, conversely, means: These conditions are currently not met. Europe’s economy is largely stagnating, and the prospects for the current year have become even more cloudy compared to the previous forecast in autumn. This has a lot to do with Germany: the Commission expects the German economy to grow by only 0.3 percent in 2024, 0.5 percentage points less than in the fall. The Federal Republic therefore occupies last place among the 20 euro countries. The authority expects growth of 0.9 percent for the entire EU. In its autumn forecast, the commission had expected 1.2 percent.
Germany has thus become a brake on the European economy. Last year, Germany’s economy shrank by 0.3 percent, the commission estimates, because of a toxic mix: “The high construction and credit costs, the labor shortage and high energy prices depressed investments in the construction industry and in energy-intensive sectors,” writes the commission . Because of the persistently high inflation, citizens had less money to spend, which is why private consumption slowed.
“The prospects of an increase this year are very poor,” said Gentiloni. Germany has a strong influence on the other economies of Europe. This is “of course a challenge for all of us”. With a view to 2025, the situation looks better, said the Italian, although one should not ignore the “structural problems” of Europe’s largest economy: an aging society with a persistent shortage of skilled workers, the export orientation of the German economy in the age of deglobalization and threatened competitiveness the energy-intensive industry. The restrictive budget policy that the Federal Constitutional Court forced the traffic light government to adopt in the fall is putting an additional strain on short-term growth prospects.
It sounded even more dramatic on Thursday at the German Chamber of Commerce and Industry (DIHK). She expects the economy in Germany to shrink again and expects a decline of 0.5 percent for 2024. “The crisis is here,” said DIHK Managing Director Martin Wansleben. The government will have to face this. According to the survey, a third of companies want to invest less in Germany, and only 24 percent of companies are aiming for higher investments. This typically also weighs on long-term growth prospects.
Inflation could return to normal in 2024
In Brussels it would not suit the style of the institutions to paint things so darkly. Gentiloni also described two clear rays of hope. First, 2024 is likely to be the year when inflation finally normalizes. The commission predicts that the inflation rate will have already fallen faster than expected in 2023 and will almost halve to 2.7 percent by the end of the year. The Brussels economic experts see the reason for this primarily in the lower energy prices. In wholesale, these fell faster than estimated in the autumn forecast. “Retail energy prices are therefore expected to fall further and help the EU regain some of the competitiveness lost during the energy crisis,” it said. In 2025, inflation could level off at the European Central Bank’s target of around two percent.
The second bright spot is a robust labor market – albeit one that varies greatly from region to region. Gentiloni said it had proven its resilience last year; employment continued to rise and the unemployment rate remained at its historic low in December. It appears that the labor market will continue to be able to withstand the economic weakness.
The Houthi attacks in the Red Sea have so far had little impact
Now, in times of war, no economic forecast can be made without reference to the new geopolitical tensions and the high level of uncertainty under which the Commission’s economists carry out their model calculations. Russia’s war in Ukraine weighs on growth prospects; The danger of escalation in the Middle East is incalculable. The threat to shipping traffic in the Red Sea has not yet had a strong inflationary effect, writes the Commission. However, if the situation there worsens, there could be “renewed supply bottlenecks” that “strangle production and drive up prices.”
Perhaps, as is echoed in the subtext of the Commission’s publications, things will turn out well for Europe’s economy again. but who knows that? The most recent forecasts, some of which were bad, were all a little too optimistic.