Commission says Europe is entering recession

Ireland will top the European table for GDP growth in 2022 and 2023

Ireland would top the eurozone countries this year with 7.9% growth in GDP and avoid recession. Picture: Damian Coleman

The European Union will enter recession this winter as growth forecasts for 2023 are slashed due to prolonged inflation and the war in Ukraine.

The EU Commission's Autumn Economic Forecast projects GDP to fall this quarter with the contraction to continue in the first quarter of next year. Real GDP growth is forecast to grow at just 0.3% in 2023, well below the 1.5% it had forecast in the summer.

The Commission said Ireland would top the eurozone countries this year with 7.9% growth in GDP  which they forecast will moderate to 3.2% in 2023 and 3.1% in 2024 on the back of lower purchasing power and uncertainty weighing on investment.

"Net exports, particularly of multinational corporations, are expected to remain resilient and be the main driver of growth," the assessment for Ireland states. Inflation here is expected to peak at 8.3% this year and to remain high at 6% in 2023 before moderating to 2.8% in 2024.

"Sharply higher inflation is squeezing households’ real income and weighing on consumer sentiment, as already shown by lower retail sales over the summer," the assessment states.

The EU forecasts that only Malta will join Ireland is growing their economies by more than 2% next year. For the rest of Europe, the picture is much bleaker.

The forecast states that the EU is among the most exposed economies, due to its geographical proximity to the war and heavy, but diminishing, reliance on imports of fossil fuels.

The economy confronting them is buckling under the crushing weight of inflation that reached a new euro-era high of 10.7% in October. The Commission reckons price growth across Europe will now average 8.5% this year and 6.1% in 2023 - both markedly higher predictions than made in July.

“The EU economy is at a turning point” and the outlook “has weakened significantly,” Economy Commissioner Paolo Gentiloni told reporters in Brussels. “Inflation has continued to rise faster than expected, but we believe that the peak is near.”

The Commission cautioned too that plenty can go awry again in 2023. “The economic outlook remains surrounded by an exceptional degree of uncertainty as Russia’s war of aggression against Ukraine continues and the potential for further economic disruptions is far from exhausted,” officials said. 

“The largest threat comes from adverse developments on the gas market and the risk of shortages, especially in the winter of 2023-24.” 

Addressing the policy outlook, ECB Executive Board member Isabel Schnabel said on Thursday that borrowing costs will need to rise to a level that puts a brake on the economy. She also addressed the threat of a contraction.

“It’s clear that the risk of a recession has gone up, given the data that we’ve seen,” Schnabel said. “We will need to raise rates further, probably into restrictive territory, to bring inflation back to our medium-term inflation target in a timely manner.”

Additional reporting Bloomberg