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European Commission cuts euro-area growth forecast due to Germany’s contraction

The European Commission has revised its outlook for the euro-area economy, predicting that it will grow by 0.8% in 2023, compared to an earlier forecast of 1.1% growth. The updated projections were published on Monday, September 11, 2023. The article further states that the region’s biggest economy, Germany, is largely to blame for this contraction. Germany had been expected to grow in 2023 but is now facing a slump of 0.4%.

According to reports, the euro zone is becoming mired in a prolonged period of subdued growth and above-target inflation. They may also offer a likely flavor of the ECB’s own quarterly outlook, which is due Thursday and will help officials determine whether to extend or pause their historic bout of interest-rate hikes.

The European Union’s executive arm cut its outlook for the euro-area economy, predicting it will be dragged down this year by a contraction in Germany. Output in the 20-nation currency bloc will rise by 0.8% in 2023, compared with an earlier forecast for 1.1% growth.

The region’s biggest economy is largely to blame. Germany, which had been expected to grow in 2023 is now facing a slump of 0.4%. The Netherlands saw an even heftier downward revision, to 0.5% from 1.8%. Spain and France, at the other end of the spectrum, are set to aid expansion.

Inflation will stay elevated and won’t retreat to the European Central Bank’s 2% goal. It’s seen at 5.6% this year, a little lower than previously envisaged, but a touch higher in 2024, at 2.9% . The fresh numbers may stoke fears that the euro zone is becoming mired in a prolonged period of subdued growth and above-target inflation.

They may also offer a likely flavor of the ECB’s own quarterly outlook, which is due Thursday and will help officials determine whether to extend or pause their historic bout of interest-rate hikes.

Despite dodging a recession in the wake of Russia’s attack on Ukraine, the euro region is struggling under the weight of higher energy prices, a surge in borrowing costs and waning demand in export markets like China.

Data released last week revealed output in the bloc barely grew in the three months through June, revised lower due to poor foreign sales. Surveys of purchasing managers point to a tough third quarter as Europe’s services sector follows manufacturing into a contraction.

Nowhere are such problems on starker display than in Germany, which has been weighed down primarily by a manufacturing slump. After enduring a winter downturn, its economy failed to expand in the second quarter and could shrink by 0.3% in the third.

The souring backdrop has been on the minds of several ECB officials who say it’s time to halt the forceful tightening campaign they embarked on just over a year ago. Others, though, have signaled they’d be comfortable with a mild recession if that’s needed to get inflation back to 2% .

A writer at Parallel Facts