Although the start of a New Year is usually a time of hope, recent economic projections by several economic analysts have painted a rather gloomy picture of what the European economy will look like in 2023.
According to recent reporting, the European Union is likely to enter a recession in the coming months, as reduced economic growth, rising inflation and the war in Ukraine continue to wreak havoc on the global economy.
A recent economic forecast by the EU Commission has projected that the average GDP across the EU will fall sharply in Q1 of 2023. This means that the real GDP across the European Union will fall to just 0.3% from the 1.5% that had been forecast in the summer economic statement.
Although exports are continuing at a relatively steady rate, sharp inflation is continuing to squeeze the real income of households. This is also reflected in consumer sentiment, which has fallen significantly since the summer.
The only two countries in the EU that are projected to grow their economies by more than 2% are Ireland and Malta.
One interesting insight from all this is that Europe is among the most exposed economies to the declining global economy. This is largely due to its proximity to the war in Ukraine and, in particular, their over-reliance on imports of fossil fuels. The need to accommodate millions of refugees fleeing the war will also have an impact on already stretched public finances.
Inflation peaked at around 10.7% for the EU in October, although this is expected to reduce slightly to around 6.1% in 2023. With a projected GDP growth rate of just 2% on average across the continent, this presents obvious issues for households and governments alike.
The economic outlook for Europe is further complicated by uncertainty surrounding the war of aggression launched by Russia, with no clear path for resolution in sight. It is also likely that if no resolution is possible in the immediate future, the cost of supporting Ukrainian forces will add another burden to the budgets of EU member states.
The European Central Bank Outlook
In slight contrast to this distinctly gloomy outlook painted by the EU Commission, the European Central Bank (ECB) gives a similar, but arguably more optimistic assessment of what the European economy will look like in 2023.
In their December 2022 outlook, they note that while inflation will remain high in the short term, it will have fallen sharply to 3.6% by the end of 2023.
In terms of what causes inflation to change in this context, reductions in energy prices and other costs, as well as ECB monetary policy measures, will help to improve things.
Despite the reduction in the rate of inflation in the long run, however, the ECB’s outlook is still somewhat cautious. In particular, they note that inflation has helped to weaken both consumer and business confidence. This will slow economic growth from around 3.4% in 2022, to just 0.5% in 2023.
This will cause a reduction in the GDP outlook for 2023, although this is predicted to recover to 1.9% in 2024 and 1.8% in 2025.
The View From Goldman Sachs
The economics research wing of Goldman Sachs — the leading multinational investment bank and financial services company — presents a similarly dim view of the European economy in 2023.
In their most recent report, they reaffirmed their view that the deepening energy crisis will push the EU economy into recession. This will be worsened as production and output will slow across energy-intensive industries, with consumer confidence further weakened by stubbornly high inflation. This is despite the fact that supply chain issues and trucking delays on the continent have been largely resolved.
Despite this, Goldman Sachs does state that the recession will be relatively short-lived and much shallower across Europe. The rebalancing of the energy market in Europe has helped this, which has helped to soften the blow of the war in Ukraine in the short term. This confluence of factors has prompted Goldman Sachs to revise their macroeconomic contraction estimate from 1.1% to 0.7%.
Further uncertainties regarding the ongoing war in Ukraine make forecasting for the year ahead a complicated task. This is exacerbated by the ongoing uncertainties regarding Brexit, which is far from a settled matter at the time of writing.
With all of these factors in mind, Goldman Sachs overall prediction for Europe is that there will be a relatively mild recession, with a higher terminal rate on the horizon.