What's Europe's 2023 economic outlook? 

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.

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