EU forecasts economic growth for the year, but inflation still painful

The EU's executive branch raised its economic growth forecast for the year, saying Europe will narrowly avoid a recession and has already passed its inflation peak.

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 per cent 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 per cent expected in the last outlook from November.

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

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 per cent in the last 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.

The EU economy beat expectations last year, with resilient growth in spite of the shockwaves from the Russian war of aggression, said Paolo Gentiloni, EU commissioner for economy.

And we have entered 2023 on a firmer footing than anticipated: The risks of recession and gas shortages have faded, and unemployment remains at a record low. Yet Europeans still face a difficult period ahead.

The commission warned in the report that headwinds "remain strong. Energy costs and consumer prices are still high even after three straight months of decline in annual inflation from the 10.6 per cent peak in October to 8.5 per cent 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 across the economy.

As inflationary pressures persist, monetary tightening is set to continue, weighing on business activity and exerting a drag on investment, the commission said in a statement.