EU economy loses momentum amid Ukraine war, inflation, natural disasters and higher interest rates

The bloc’s economy “continues to grow, albeit with reduced momentum,” the European Commission said in an interim report published on Monday morning.

The European Union as a whole is now predicted to grow by a modest 0.8% this year, slightly down from the 1% projected in spring, and by 1.4% in 2024.

The eurozone will see similarly downgraded rates: 0.8% in 2023 (compared to 1.1% in the previous estimation) and 1.3% in 2024.

Germany, the bloc’s industrial powerhouse, will experience a downturn of –0.4% this year, a troubling sign that is set to resonate across its neighbours. Poland, for example, will expand by just 0.5% in 2023 after posting a healthy 5.1% rate in 2022.

Inflation among the countries that use the single currency is expected to reach 5.6% in 2023 and 2.9% in 2024 – a figure still far from the 2% annual target that the European Central Bank is trying to achieve by raising interest rates.

The bank will hold a new meeting on Thursday to decide what could be its tenth hike since July 2022.

The tighter monetary conditions imposed by the ECB are one of the many reasons behind the across-the-board loss of momentum in the EU’s economy.

The report points to weaker consumption, a slowdown in credit provisions and sluggish industrial output as possible causes, coupled with the uncertainty unleashed by Russia’s war on Ukraine and the damage caused by natural disasters, including the extreme floods and wildfires seen this summer.

The European Commission underlines the extent to which high prices have permeated all sectors of the economy, going well beyond energy, which was the initial driver behind last year’s record-breaking inflation but has since then receded.

“Monetary tightening may weigh on economic activity more heavily than expected, but could also lead to a faster decline in inflation that would accelerate the restoration of real incomes,” the report says.

“By contrast, price pressures could turn out more persistent, prompting a stronger response of monetary policy.”

In some goods news, the EU’s labour market remains “exceptionally strong”, with an unemployment rate of 5.9% in June and a continued rise in wages.