Although the contraction of the EU economy predicted in autumn has been averted, headwinds persist to blow, especially against workers. The high price level is a burden on people and economic development remains sluggish. There is also great uncertainty due to the war and geopolitical tensions. Against this background, an active countercyclical economic policy is particularly important.
On 13 February, the European Commission published its Winter 2023 Forecast on the EU’s economic development. The good news: the gloomy Autumn Economic Forecast did not materialise, and the EU narrowly avoided a recession. For 2023 as a whole, moderate growth of 0.8% is expected, 0.6 percentage points higher than assumed in the Autumn Forecast. Growth of 1.6% is expected for 2024.
The fact that the forecasts since last autumn are less pessimistic is mainly due to developments in the field of energy supply. On the one hand, the EU is now more diversified in terms of energy sources. And much less gas has been consumed than expected on the other, so that storage facilities are well filled. In fact, wholesale prices for gas are now significantly lower and, according to the forecast, are even far below the level they were before the war in Ukraine. However, on the whole the development is likely to remain sluggish. The - controversial - monetary policy response to the ongoing inflationary pressure is also likely to have a negative impact in the future. This is likely to lead to rising interest rates and thus to increased pressure on investments and the economy as a whole.
High price level puts pressure on purchasing power
While it is very pleasing that the unemployment rate was at a low of 6.1% at the end of 2022, it is also assumed that the peak of inflation has been overcome. After a value of 9.2% in 2022, inflation is expected to reach 6.4% in 2023 and only 2.8% in 2024. However, these developments are hardly reaching the people yet.
Despite lower wholesale prices for gas, energy costs for consumers remain high. Core inflation, i.e. inflation excluding energy and unprocessed food, went up even further in January 2023. Overall, the increased cost of living is not reflected in wages. This means a loss of purchasing power for workers.
Geopolitical developments high factor of uncertainty
International developments continue to pose significant risks to the EU economy. For example, it has not been ruled out that the ongoing geopolitical tensions will again be reflected in the form of price increases. Following China's reopening, foreign demand is expected to increase, which is good news for the export economy. However, the flip side of this could once again be increased global inflationary pressure.
Overall, the war in Ukraine, while not escalating, is expected to continue throughout the forecast period, which extends to 2024. EU Commissioner Paolo Gentiloni rightly states that the greatest risks come from geopolitical tensions and the further development of the war. This represents a high uncertainty factor for the economy, investments and companies.
In the sense of a prosperity-oriented economic policy, an active public policy in the EU as a whole is particularly important in such a mixed situation. Sufficient scope, for example, for public investment in the future is not only crucial to manage the green transition in a fair way. The possibility for short-term stabilisation of the economy by the state is also particularly necessary in the current situation.
Austria's development within the EU-wide trend
In Austria the European trends are broadly mirrored. After a strong recovery from the Corona crisis in the first half of 2022, momentum slowed down significantly in Austria as well. This was mainly due to the decline in industrial production. Nevertheless, the economy still grew by 4.8% in 2022. In contrast, the growth forecasts for 2023 at 0.5% and for 2024 at 1.4% are somewhat below the EU value. Expectations about future developments are clearly below the long-term average.
According to the Commission, positive effects should come from an increase in disposable income, which is based on lower energy prices and higher wages. It sees wages slightly outpacing inflation in recent months and fears that this will put pressure on prices. In fact, it is the profit total that is running away, and thus causes an inflationary effect. According to the Commission, too little labour supply could also have a dampening effect on production. Of course, there is a simple remedy here – as demanded from the workers perspective - namely good working conditions and fair wage increases.
European Commission: Winter 2023 Economic Forecast
European Commission: Winter 2023 Economic Forecast: EU Economy set to avoid recession, but headwinds persist
Budget Policy: Cuts or investments (German only)
AK EUROPA: Autumn 2022 Economic Forecast