EU foresees economy improving, but inflation still painful

FRANKFURT [GERMANY]: The European Union’s executive branch has raised its economic growth forecast for the year, saying Europe will narrowly avoid a recession and has already passed its inflation peak as natural gas prices fall from astronomical highs.

But the European Commission warned Monday that the high prices plaguing consumers will keep holding back the economy for months to come.

Growth for 2023 should reach 0.8% for the 20 EU countries that use the euro currency, the commission said in its winter economic outlook. That is an increase from 0.3% expected in the last outlook from November.

For the broader 27-nation bloc, growth was estimated at 0.9%, also up from 0.3%.

Getting credit for the improvement was the high level of natural gas storage that has alleviated fears of energy rationing over the winter. European utilities and governments raced to line up new supplies after Russia cut off most natural gas deliveries to Europe amid the war in Ukraine.

Prices for natural gas — used to heat homes, fuel industry and generate electricity — reached record levels last summer, rising to 18 times above their pre-crisis level, and led households and businesses to reduce their use. Prices have since fallen from that peak, though they are some three times higher than before Russia started massing troops on Ukraine’s border.

The economy is expected avoid a contraction in the current January-to-March quarter, the commission said. Coming after growth of 0.1% in the final three months of last year, that indicates there won’t be a technical recession as was once feared.

Two straight quarters of shrinking economic output is one definition of recession, though the economists on the eurozone business cycle dating committee use a broader range of data such as unemployment and the depth of the downturn when assessing whether to declare a recession.

Paolo Gentiloni, European commissioner for economy, cited the effort to line up new supplies of natural gas and a 25% drop in use because of high prices and conservation measures as the major achievement behind the improved outlook. “What we were able to manage was the energy independence from Russia,” he said at a news conference.

While the outlook is “less negative than we expected,” Gentiloni said, “this doesn’t mean we have a positive overall outlook.” He said “inflation will release its grip on purchasing power only gradually.” And the possibility that the war in Ukraine could further disrupt the economy is a risk to growth that “is not easy to predict.”

Headwinds to the economy are strong, the commission said in its report. Energy costs and consumer prices are still high even after three straight months of decline in annual inflation from the 10.6% peak in October to 8.5% in January.

On top of that, the European Central Bank is sharply raising interest rates to contain inflation, a step that dampens growth by raising the cost of borrowing for consumers and businesses.