European

commission

ISSN2443-8014(online)

EuropeanEconomicForecast

Summer2023

INSTITUTIONALPAPER255|SEPTEMBER2023

EUROPEANECONOMY

EconomicandFinancialAffairs

EuropeanEconomyInstitutionalPapersareimportantreportsanalysingtheeconomicsituationandeconomicdevelopmentspreparedbytheEuropeanCommission'sDirectorate-GeneralforEconomicandFinancialAffairs,whichservetounderpineconomicpolicy-makingbytheEuropeanCommission,theCounciloftheEuropeanUnionandtheEuropeanParliament.

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Coverphotography:?iS/kwasny221

EuropeanCommission

Directorate-GeneralforEconomicandFinancialAffairs

EuropeanEconomicForecast

Summer2023(Interim)

EUROPEANECONOMYInstitutionalPaper255

CONTENTS

iii

Easinggrowthmomentumamiddeclininginflationandrobustlabourmarket1

1.EAandEUoutlook2

1.1.Settingthescene2

1.2.Theglobaleconomy:recentdevelopmentsandoutlook2

1.3.Commodities4

1.4.Financialmarkets5

1.5.RecenteconomicdevelopmentsintheEU8

1.6.Theoutlook13

1.7.Riskstotheoutlook17

2.ProspectsbyMemberStates18

2.1.Germany18

2.2.Spain18

2.3.France19

2.4.Italy20

2.5.TheNetherlands20

2.6.Poland21

PreviousEuropeanEconomicForecasts25

LISTOFTABLES

1.Overview-theSummer2023interimForecast1

1.1.Internationalenvironment3

LISTOFGRAPHS

1.1.GrowthinglobalGDPandglobalPMIs2

1.2.Short-termeuroareainterestrateexpectationsatdifferentdates6

1.3.CompositeCreditCostIndicatorandcredittotheeuroareaprivatesector6

1.4.10-yearsovereignbondyields,internationalcomparison7

1.5.10-ysovereignbondyieldspreadstoGermanbond,selectedeuroareacountries7

1.6.Businessregistrationsandbankruptcies,EU8

1.7.RealGDPgrowthanditscontributions,EU9

1.8.GDPdemand-sidecomponents,EUexcludingIE9

1.9.Short-termindicators,EU9

1.10.ESIandPMI,euroarea10

1.11.Factorslimitingproduction,euroarea10

1.12.Newordersorincomingnewbusiness,euroarea10

1.13.Employment,unemploymentandlabourmarketslack,EU11

1.14.Labourlimitingproductionandvacancyrates,EU11

1.15.Headlineinflationandvariousalternativemeasuresofcoreinflation,euroarea12

1.16.Measuresofunderlyingpricepressures,euroarea12

1.17.AnnualisedmomentumofmajorHICPcomponents,euroarea13

1.18.Inflationbreakdown,EU14

1.19.Inflationexpectationsderivedfromimpliedforwardinflation-linkedswaprates14

iv

LISTOFBOXES

1.1.InsightsfromtheCommission'sconsumersurvey:howinflationisshapingconsumerconfidence

andspending.14

2.1.Sometechnicalelementsbehindtheforecast23

Summer2023(Interim)Forecast

EASINGGROWTHMOMENTUMAMIDDECLININGINFLATIONANDROBUSTLABOURMARKET

1

TheEUeconomycontinuestoshowresilienceinthefaceoftheformidableshocksithasenduredinrecentyears,butithaslostmomentum.EconomicactivityintheEUwasverysubduedinthefirsthalfof2023.Weaknessindomesticdemand,inparticularconsumption,showsthathigh,andstillincreasingconsumerpricesformostgoodsandservices,aretakingaheavytoll,morethanexpectedintheSpringForecast.Thisisdespitedecliningenergypricesandanexceptionallystronglabourmarket,whichhasseenrecordlowunemploymentrates,continuedexpansionofemploymentandrisingwages.Meanwhile,thesharpslowdownintheprovisionofbankcredittotheeconomyshowsthatmonetarypolicytighteningisworkingitswaythroughtheeconomy.Surveyindicatorspointtoslowingeconomicactivityinthesummerandmonthsahead,withcontinuedweaknessinindustryandfadingmomentuminservices,despiteastrongtourismseasoninmanypartsofEurope.

TheweakergrowthmomentumintheEUisexpectedtoextendto2024,andtheimpactoftightmonetarypolicyissettocontinuerestrainingeconomicactivity.Astheoutlookforglobalgrowthandtraderemainsbroadlyunchangedcomparedtospring,theEUeconomycannotcountonstrongsupportfromexternaldemand.However,amildreboundingrowthisstillprojectednextyear,asinflationkeepseasing,thelabourmarketremainsrobustandrealincomesgraduallyrecover.

Retailenergypricesaresettocontinuedecliningfortheremainderof2023,butataslowingpace.Theyareprojectedtoincreaseslightlyagainin2024,drivenbyhigheroilprices.Inflationinservicesissettocontinuemoderatingasdemandsoftens,undertheimpactofmonetarypolicytighteningandafadingpost-COVIDboost.Theothernon-energycomponentsoftheconsumptionbasketwillcontinuecontributingtoeasinginflationovertheforecasthorizon,alsoreflectinglowerinputpricesandnormalisingsupplychains.

Overall,thisforecastrevisesgrowthdownfortheEUandtheeuroareainboth2023and2024.HICPinflationisexpectedtocontinuedeclining,broadlyinlinewiththespringprojections.

Russia’songoingwarofaggressionagainstUkraineandwidergeopoliticaltensionscontinuetoposerisksandremainasourceofuncertainty.Furthermore,monetarytighteningmayweighoneconomicactivitymoreheavilythanexpected,butcouldalsoleadtoafasterdeclineininflationthatwouldacceleratetherestorationofrealincomes.Bycontrast,pricepressurescouldturnoutmorepersistent,promptingastrongerresponseofmonetarypolicy.Mountingclimaterisksalsoweighontheoutlook.

Table1:

Overview-theSummer2023interimForecast

RealGDPgrowthSummer2023Spring2023

Inflation

Summer2023Spring2023

interimForecast

202220232024

Forecast

2024

interimForecast

202220232024

Forecast

20222023

20222023

2024

Euroarea

3.3

0.8

1.3

3.5

1.1

1.6

8.4

5.6

2.9

8.4

5.8

2.8

EuropeanUnion

3.4

0.8

1.4

3.5

1.0

1.7

9.2

6.5

3.2

9.2

6.7

3.1

Germany

1.8

-0.4

1.1

1.8

0.2

1.4

8.7

6.4

2.8

8.7

6.8

2.7

Spain

5.5

2.2

1.9

5.5

1.9

2.0

8.3

3.6

2.9

8.3

4.0

2.7

France

2.5

1.0

1.2

2.6

0.7

1.4

5.9

5.6

2.7

5.9

5.5

2.5

Italy

3.7

0.9

0.8

3.7

1.2

1.1

8.7

5.9

2.9

8.7

6.1

2.9

Netherlands

4.3

0.5

1.0

4.5

1.8

1.2

11.6

4.7

3.0

11.6

4.9

3.3

Poland

5.1

0.5

2.7

5.1

0.7

2.7

13.2

11.4

6.1

13.2

11.7

6.0

Summer2023(Interim)Forecast

1.EAANDEUOUTLOOK

2

q-o-q%

>

=expansion

1.1.SETTINGTHESCENE

ThisSummerinterimForecastupdatestheGDPandinflationprojectionsoftheprevious,full-fledgedEuropeanEconomicSpring2023Forecast,withfocusontheeconomiesofthesixlargestEUMemberStates,aswellastheeuroareaandtheEUaggregates.Country-specificprojectionsforrealGDPgrowthandHICPinflationin2023and2024arepresentedforGermany,Spain,France,Italy,theNetherlandsandPoland.Fortheremaining21MemberStates,latesteconomicdevelopmentsarefactoredintothecalculationoftheEUandeuroareaaggregates.Thankstothelatertimingforitspublication–inSeptemberinsteadofJulyasperpastpractice–,itfactorsinkeydatareleasedoverthesummer,includinginformationonrealGDPgrowthinthethirdquarterandinflationinAugust.

ThefactorsshapingthisforecastarenotsignificantlydifferentfromthoseunderpinningtheSpringForecast.Theglobaleconomyfaredsomewhatbetterthananticipatedinthefirsthalfoftheyear,despitetheweakperformanceinChina.However,theoutlookforglobalgrowthandtraderemainsbroadlyunchangedcomparedtospring,implyingthattheEUeconomycannotcountonstrongsupportfromexternaldemand.Thetighteningofmonetaryconditionsisassumedtocontinueinlinewithmarkets‘expectationsforshortandlongtermrates,withoutproducinganydisorderlyadjustmentinfinancialmarkets.Asforenergycommodityprices,spotandfuturespricesforoilhavemovedupcomparedtothepricesassumedinspring,butgasandaverageelectricitypricesarelower.Risksofenergysupplyshortageshavereceded,anditisstillassumedthat(limited,butadjusting)supplywillmatch(restrained)demandthroughouttheforecasthorizon.Lastbutnotleast,geopoliticaltensionscausedbyRussia’swarofaggressionagainstUkrainehavenoteasedandtheworkingassumptionunderpinningthisforecastisagainthattheywillnotberesolvedwithintheforecasthorizon.

1.2.THEGLOBALECONOMY:RECENTDEVELOPMENTSANDOUTLOOK

Globaleconomicactivitymoderatedinthesecondquarterof2023.Globalgrowthisestimatedtohaveslowedto0.5%q-o-qinthesecondquarterof2023,afterastrong(1%q-o-q)beginningoftheyear(seeGraph1.1).Growthin2023-Q2wasdrivenmainlybyrobustactivityintheUS,wheredomesticdemandcontinuedtoexpand,andinotheradvancedeconomies.Atthesametime,growthinChinaslowed,astheinitialreopeningsurgefizzledout.

TheUSeconomyhasheldupbetterthanexpectedsincethestartoftheyear.Outputincreasedby0.5%q-o-qinboth2023-Q1and2023-Q2onthebackofrobustconsumptiongrowthandpositivesurprisesininvestment,possiblyspurredbysubsidiesundertheCHIPSandScienceActandtheInflationReductionAct.Withtheunemploymentrateat3.8%inAugust,stillnearthetroughof3.4%,andcontinuedemploymentgrowth,thelabourmarketremainstight.However,thevacancyratestartedtosubside,andunemploymentclaimsarecreepingup.Julymonthlydatapointtoacontinuedexpansionoftheeconomyinthethirdquarter,withindustrialproductionupsharply(1%m-o-m)andretailsalesalsoup(0.6%m-o-m).Stronger-than-expectedgrowthinthefirsthalfoftheyearandsustainedmomentuminto2023-Q3resultsinan

Graph1.1:GrowthinglobalGDPandglobalPMIs

index50

10

8

6

4

2

0

-2

-4

-6

-8

19-Q120-Q121-Q122-Q123-Q1

GDPcontributionemergingmarkets

GDPcontributionadvancedeconomiesGlobalmanufacturingPMI(rhs)

GlobalservicesPMI(rhs)

Sources:OECD,IMFandnationalsourcesforGDP,S&PGlobalforPMI.

75

70

65

60

55

50

45

40

35

30

upwardrevisionoftheprojectionforrealGDPgrowthfor2023asawhole,comparedtotheSpringForecast.Someslowdownisstillexpectedin2024inthefaceofgraduallydeterioratingconsumerfinancesinahighinterestrateenvironment.

Summer2023(Interim)Forecast

3

Table1.1:

Internationalenvironment

(Annualpercentagechange)

Summer2023

interimForecast

Spring2023

Forecast

201920202021202220232024202220232024

RealGDPgrowth

World(excl.EU)

2.9

-2.6

6.3

3.2

3.2

3.2

3.2

3.1

3.3

Tradevolumes

World(excl.EU)exportsofgoodsandservices

0.2

-7.0

10.4

4.0

1.4

3.2

3.9

2.2

3.2

World(excl.EU)importsofgoodsandservices

-0.6

-8.3

11.3

4.8

1.5

3.4

4.8

1.4

3.0

Theoutlookfortheotheradvancedeconomiesfor2023hasbrightenedaswell.ActivityintheUKhasheldupbetterthanpreviouslyexpected,despiteenergypricesandinflationbeinghigh.RealGDPgrewby0.1%in2023-Q1and0.2%in2023-Q2,leadingtoanupwardrevisiontothegrowthoutlookfor2023comparedtotheSpringForecast(

1

).However,asmonetarypolicycontinuestotightenamidpersistentinflationarypressuresandtheoutlookfortrade,investmentandproductivityremainsweak,thegrowthprojectionfor2024isnowlower.InJapan,GDPgrowthwasarobust1.5%q-o-qin2023-Q2,drivenbyrapidexpansionofexportsonrecedingsupplybottlenecksandboomingtourism.Theoutlookfor2023ismarkedupcomparedtothespringonaccountofthestrongoutcomeinthefirsthalfoftheyear,whilefor2024ithasbeenslightlyloweredaselevatedinflationisexpectedtodentprivatedemand.

China’sreopeningreboundfollowingitsstrictCOVID-19policiesprovedshort-lived.China’sGDPgrowthslowedconsiderablyto0.8%q-o-qin2023-Q2,from2.2%inthefirstquarter.Householdspendingremainedsubduedduetorelativelypoorlabourmarketoutcomes,especiallyforyouth,andstillhighprecautionarysavings.Investmentgrowthweakened,onthebackofpoorinvestorconfidenceandlowprivatesectorinvestment,especiallyinrealestate.Julydatapointtofurthersofteninginactivity,addingtounfavourabledevelopments(e.g.,consumerandproducerpricedeflation,therisingdefaultriskofamajorpropertydeveloper,andmissedpaymentsonhigh-yieldinvestmentproductsbyalargeprivatewealthmanager).Theeconomyisstrugglingwithaconfidencecrisis,withbothhouseholdsandprivateenterprisesfocusingonsavingorreducingdebt.Externaldemandisalsoweakening,leavingonlythestate-runsectorstodrivegrowth.Withoutfurthermoredecisivepolicysupporttoboostdemandinthesecondhalfof2023,theoutlookisreviseddownwardscomparedtothespring.ThedirectimpactofthedownwardrevisionontheEUeconomyislikelytobemarginal(

2

).

RecentPMIreadingspointtomoderationinglobalgrowthoverthesummer.GlobalcompositemanufacturingandservicesPMIshavefallenfromtheirAprilreadings(whichweretakenintoaccountintheSpringForecast).TheglobalmanufacturingPMIwasat48.7inJuly(49.6inApril),whiletheservicesPMIwas52.7inJuly(55.4inApril),withPMIsinemergingmarketeconomieshigherthanintheadvancedeconomies.

Overall,globalgrowthisnowprojectedslightlyhigherthaninspringfor2023,butslightlylowerfor2024.Withhigher-than-projectedgrowthinthesecondquarterof2023inmajoradvancedeconomies(e.g.US,Japan,UK),butsoftermomentuminChina,onbalance,realglobalGDPgrowthisforecasttoreach3.2%(+0.1pps.)in2023and3.2%(-0.1pps.)in2024.

Globaltradegrowthdeterioratedduringthesummeramidweakdemand.Globaltradevolumesmomentum(latestthreemonthsonthethreemonthsbefore)declinedto-0.3%inJune,downfrom+0.7%inMay.Morerecentdatasignalamarkeddeteriorationofglobaltradeduringthesummer,withtheKieltradeindicatorfallingby1.6%m-o-minJulyand0.3%inAugust.Inaddition,newexportordersinglobalPMIsdeclinedfurther(47.8inJulyvs.48.3inJune)andstillpointtoadivergencebetweengoods,registeringadeeperdownturninexportperformanceamidstweakglobaldemand,andservices.Growthinglobaltradeis

(1)Moreover,takingaccountofsignificantrevisionstonationalaccountsdatafor2020and2021,thevolumeofUKGDPisnowestimatedtobe1.8%abovepre-pandemiclevel,insteadofbeingjustbelowinpreviousestimates.

(2)Chinaisthedestinationoflessthan2.5%ofGDPworthofexportsofgoodsandservicesbytheEUortheeuroarea,whereasitistheoriginofalmost4%ofGDPworthofimports.

Summer2023(Interim)Forecast

4

forecasttoslowsignificantly(to1.5%)in2023,despiteabetter-than-previously-expectedoutlookforChineseimports,drivenbyahigherimportshareindomesticdemandandstockpilingofoilandrawmaterials.Worldtradeisforecasttopickupmoderately(+3.4%)in2024,thoughgrowthisprojectedtoremainmuchbelowlong-termaverages.ThisimpliesminorupwardrevisionsforglobalimportsrelativetotheSpringForecastforboth2023and2024(seeTable1.1),whichmaybeoflimitedrelevanceforEUexports.

Supplychainpressuresincreasedmarginallybutremainrelativelylowaftersteadyimprovementsincelate2021.InJuly,theFederalReserveSupplyChainPressureIndexroseto-0.9,(

3

)from-1.14inJuneandahistoricallowof-1.56inMay.Thesupplier’sdeliverytimesindexreportedinglobalPMIsdeterioratedslightly(51.9inJulyvs.52.3inJune)butcontinuestoindicateanimprovementindeliverytimes.Containershipwaitingtimeatmajorportscontinueddecreasingorremainsatlowlevels,withthelowwaterlevelsatthePanamaCanalnothavinganoticeableimpactonglobalmaritimetraffic.Shippingratesremaincontained,albeitthestartofthepeakshippingseasoncamewithanincipientincreaseinratessincelateJuly.

Globalheadlineinflationcontinuedtodeclinein2023,butcoreinflationremainshigh.Inflationarypressuresmoderatedonlowercommoditypricesandsofteningglobalgoodsdemand.Global(ex-US)headlineinflationretreatedto4.2%(

4

)inJune2023,fromapeakof7.4%inOctober2022.However,underlyinginflationarypressuresremainmoreelevated(inflationexcludingenergyandfoodstoodat4.9%inJune),reflectingtightlabourmarketsandhighservicepriceinflation,bothinadvancedandemergingmarketeconomies(exceptforChina).

Globalmonetarypolicywastightenedoverthesummer.HavingpausedinJuneforthefirsttimesincethehikingcyclestartedintheUSinMarch2022,theFederalOpenMarketCommitteeincreaseditspolicyrateby25bps.atitsmeetinginJuly(toarangeof5.25%to5.5%).Marketsnowexpectatmostonemorepolicyratehike,possiblyinNovember(withanotherpauseattheSeptembermeeting).Theexpectedtimingofthefirstratecutnowpushedfurtherout,aselevatedcoreinflation,notablyduetoservices,andhighwagegrowthremainasourceofconcernfortheFED.Centralbanksintheotheradvancedeconomies(e.g.UK,Australia,Canada)hikedinterestratesaswell(by75-50bps.sinceApril2023)amidpersistenthighcoreinflation,whileintheemergingmarketeconomiesmonetarypolicytighteningseemstohavebroadlycometoanend.Atthesametime,theChinesecentralbankcutitspolicyratesinAugustforthesecondtimeinthreemonthstoboostborrowing.

1.3.COMMODITIES

Theoutlookforoilpricesisforaslightdecline,buttohigherlevelsthanassumedinthespring,andupsideriskshavebeenbuildingup.Afteratwo-yearlowof74USDperbarrelatthebeginningofsummer,theBrentoilpricerecoveredto88USDinearlyAugustonhigherconsumption,andadecreaseofstocksandproductioncuts.Itthenretreatedto84USDonevidenceofadeepeningpropertysectorcrisisinChina.FuturespriceshavemoveduponsignsofpossibleOPEC+supplycutsandpointtoslightlyhigherpricesthanassumedintheSpringForecastforboththeremainderof2023and2024(

5

).Theoilmarketremainstight,withtheInternationalEnergyAgencypredictingglobalsupplytorunshortofdemandthisyearandsomecountriesalreadystrivingtoreplenishlowstocks.PotentialsourcesofvolatilityofcrudeoilpricesovertheforecasthorizonincludetheuncertainoutlookforsupplyfromRussia,duetotheimplementationofoilsanctions,andfromSaudiArabiaandOPEC+,aswellasthepaceofChina’srecoveryandcorrespondingoildemand.

TheoutturnandoutlookforEuropeangasandelectricitypriceshaveimprovedrelativetospring.

Spotpricesturnedoutlowerthanpreviouslyexpectedin2023-Q2(by11%forelectricityandby15%forTTFgas).For2023-Q3marketsnowseemtosuggestlevelsthatarelowerby21%forgasand25%forelectricityrelativetowhatwasexpectedinspring.Thiswasmadepossiblebytherapidexpansionoftheliquefiednaturalgasinfrastructureandthediversificationofsupplies.GasstoragefacilitiesacrosstheEUarereported

(3)Valuesarereportedinstandarddeviationsfromtheseriesaverage.Supplypressurespeakedat4.3inDec2021.(4)CalculatedbytheFederalReserveBankofDallas

(5)TherevisionisaboveallduetothemovementsintheUSDpriceandtoafarlesserextenttotheevolutionoftheexchangerate.

Summer2023(Interim)Forecast

5

tobenear-full,implyinglimitedpressurefromstockreplenishmentgoingforward.Gasfuturessuggestpricesstayingmarginallybelowthelevelsexpectedinspringintheouterquartersof2024.Againstthisbackground,asimilarevolutionisexpectedforelectricityprices.Withenergy-intensiveindustriesandhouseholdshavingadjustedtheirenergyconsumptionpatterns,andassumingnormaltemperaturesthroughoutwinter,upsideriskstogasandelectricitypricesappearcontained.

Metalpriceshaveremainedbroadlyflatsincespring.Signalstomarketshavebeenmixed,consideringthemoresubduedChineserecovery.MetalpriceevolutionovertheforecasthorizonwillremaininfluencedbydevelopmentsinChina’sconstructionandmanufacturing,thepass-throughofmonetarypolicytighteninginadvancedeconomiesandcontinuedsupply-sideconstraintsformetalscrucialtothetransitiontocleanenergy(e.g.lithium,cobalt).

Agriculturalcommoditypricescontinueddeclining,buttheoutlookisincreasinglyuncertain.TheFAOFoodPriceIndexedgedupinJuly,followingthreeconsecutivemonthlydeclinesinarow.Asaresult,inJuly,theindexwasabout12%lowercomparedtoayearago,atlevelsseeninthesamemonthof2021.PricedevelopmentssincetheSpringForecasthavebeenmostlydrivenbylargefallsinpricesforcerealsandtoalesserdegreefordairyproductsandvegetableoils.Uncertaintyonthepriceoutlookremainselevated(

6

),especiallyforcereals(notablywheat,despitepositivenewsaboutthisyear’scropinsomeregions),givenRussia’swithdrawalfromtheBlackSeaGrainInitiative,changesinglobaldemand,exportrestrictions(rice)andweather-relatedanomaliessuchasElNi?oaffectingyields.

1.4.FINANCIALMARKETS

Tightfinancialconditionscontinuetoputabrakeoneconomicactivity.Whiletheincreaseinexpectedpolicyratessincespringhasbeenmoderate,thereismountingevidenceofitsimpactonfinancingcostsandcreditvolumes.Investmentsandoverallactivityineconomicsectorsmostreliantonexternalfunding,suchasrealestate,aremostaffected.

TheEuropeanCentralBankhascontinuednormalisingitsmainmonetarypol