What's Europe's 2023 economic outlook? 

In our latest insight piece, we examine the outlook for the European economy.

Following a tumultuous 2022 due to the outbreak of war in Ukraine, the Consensus among our analysts is for Europe’s economic momentum to wane across the board in 2023 amid tightening monetary policy. The United Kingdom is expected to record the weakest performance of any European economy this year, with a forecasted 0.8% annual contraction in GDP. This will be due to government spending restraint in addition to rate hikes by the Bank of England. The Euro area is expected to flatline, with fiscal support partially offsetting tighter monetary policy. At the other end of the scale, South-Eastern Europe is expected to grow about 2% this year, thanks to resilient activity in Turkey.

 

Regarding inflation, it is expected to be by far the highest in central and southern Europe, likely due to more robust economic activity in these regions, closer linkages to Russia and Ukraine, and the Turkish president’s insistence on a loose monetary stance despite sky-high price pressures. Inflation in northern and western Europe will be notably lower in comparison, but still extremely elevated by historical standards amid pass-through effects from recent high inflation, tight labor markets and fiscal handouts.



In sum, slow growth and still-high inflation will be the order of the day this year. There are risks in both directions: On the upside, an end to the war in Ukraine could boost sentiment and reduce inflationary pressures, and a sharper-than-expected fall in inflation would reduce the required degree of monetary tightening, boding well for growth. On the downside are factors such as a potential gas shortage next winter, an escalation of the war, and further tit-for-tat sanctions between Russia and the EU. There is also the looming risk of a debt crisis in the eurozone as the ECB withdraws monetary support—particularly in Italy, where public debt is around 150% of GDP.

 

Insights from Our Analyst Network

 

On the UK’s economic outlook, analysts at ING said:

“Energy support will become considerably less generous for most households from April, and the housing market is showing very early signs of faltering. Despite the sharp fall in swap rates since September’s mini-budget crisis, mortgage rates have fallen much more gradually. A recession now looks virtually inevitable, though it might not be until the first quarter until we see more material signs of slowing.”

Regarding the ECB’s monetary stance, Goldman Sachs analysts said:

“We see compelling reasons for why the Governing Council will need to take the policy rate into restrictive territory. First, the momentum in services inflation remains firm, pointing to sticky core inflation pressures in 2023. Second, the energy crisis is likely to entail significant supply-side damage, requiring restrictive policy to slow demand. Third, we expect the major global central banks to continue hiking through Q2.” 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: January 4, 2023

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