Russia’s ongoing war against Ukraine and wider geopolitical tensions continue to pose risks and remain a source of uncertainty, says the EC.
Furthermore, 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. By contrast, price pressures could turn out more persistent.
The EU economy, it says, continues to grow, albeit with reduced momentum.
The forecast, published by the EC on Monday, revises growth in the EU economy down to 0.8% in 2023, from 1% projected in the Spring Forecast, and 1.4% in 2024, from 1.7%.
It also revises growth in the euro area down to 0.8% in 2023 (from 1.1%) and 1.3% in 2024 (from 1.6%).
Inflation is expected to continue to decline over the forecast horizon.
Latest data confirm that economic activity in the EU was subdued in the first half of 2023 on the back of the formidable shocks that the EU has endured.
The EC says weakness in domestic demand, in particular consumption, shows that high and still increasing consumer prices for most goods and services are taking a heavier toll than expected in the Spring Forecast.
This is despite declining energy prices and an exceptionally strong labour market, which has seen record low unemployment rates, continued expansion of employment, and rising wages.
Meanwhile, the sharp slowdown in the provision of bank credit to the economy shows that monetary policy tightening is working its way through the economy.
Survey indicators, says the EC, now point to slowing economic activity in the summer and the months ahead, with continued weakness in industry and fading momentum in services, despite a strong tourism season in many parts of Europe.
An EC spokesman said, “The global economy has fared somewhat better than anticipated in the first half of the year, despite a weak performance in China. However, the outlook for global growth and trade remains broadly unchanged compared to spring, implying that the EU economy cannot count on strong support from external demand.”
“Overall, the weaker growth momentum in the EU is expected to extend to 2024, and the impact of tight monetary policy is set to continue restraining economic activity. However, a mild rebound in growth is projected next year, as inflation keeps easing, the labour market remains robust, and real incomes gradually recover.”
Energy prices are set to continue declining for the remainder of 2023, but at a slowing pace. They are projected to increase slightly again in 2024, driven by higher oil prices, according to the EC.
The report says that inflation in services has so far been more persistent than previously expected, but it is set to continue moderating as demand softens under the impact of monetary policy tightening and a fading post-COVID boost.