Eurozone inflation to fall faster than expected, EU says

Eurozone inflation is projected to decline faster than previously anticipated this year due to a less severe impact from Red Sea trade disruptions, according to revised EU estimates.

The European Commission announced on Wednesday that annual inflation in the Eurozone is expected to fall to 2.5 percent this year, eventually reaching the European Central Bank’s (ECB) 2 percent target by the latter half of 2025.

In its February forecast, the Commission had predicted a more gradual decrease, with inflation dropping to 2.7 percent in 2024 and 2.2 percent the following year.

Despite the revised inflation outlook, the Commission still anticipates the Eurozone’s economy to grow by 0.8 percent this year. For the entire European Union, a slightly stronger growth of 1 percent is projected for 2024, a 0.1 percent increase from previous estimates. Last year, both areas saw growth of 0.4 percent.

“We believe we have turned a corner,” stated Paolo Gentiloni, the EU’s economy commissioner. “We expect an uptick in growth this year and further acceleration in 2025. Meanwhile, inflation is set to fall further and reach the ECB target next year.”

The Commission’s spring forecast attributes the faster-than-expected inflation decline to a weakening in goods prices, largely due to a less significant impact from Red Sea trade disruptions.

In the first quarter of this year, the Eurozone economy showed signs of recovery, with GDP rising 0.3 percent from the previous quarter. This growth was driven by higher exports, increased tourism, and a rise in consumer spending as inflation decreased.

Economic growth is expected to continue rising this year and next, especially with the European Central Bank likely to begin cutting interest rates next month. Inflation is forecasted to decrease further while wages rise, enhancing household spending power.

However, Europe’s recovery from the pandemic has been slower than other regions and was further impacted by Russia’s invasion of Ukraine. Consequently, growth in the region is projected to remain weaker compared to the US and China.

Gentiloni warned that the growth uptick is “very moderate” and subject to risks from an “uncertain, dangerous” geopolitical environment.

Many European countries still face challenges such as weak productivity, low investment levels, high energy costs, ageing populations, shrinking workforces, and reduced working hours.

Germany, which experienced a 0.3 percent economic contraction last year, is expected to grow by 0.1 percent this year. Nine other EU economies that contracted in 2023 are projected to return to positive growth.

The EU, including non-euro countries, is expected to grow by 1 percent this year, a slight increase from previous estimates. Growth in the bloc is projected to reach 1.6 percent next year.

Germany’s council of economic experts predicts 0.2 percent growth for Germany this year and 0.9 percent next year, noting that the country’s largest economy still faces sluggish demand. “Private households remain hesitant to consume, while industry and construction report few new orders,” said council member Martin Werding.

Fiscal policy is also impacting European growth as many governments are reducing spending due to the reintroduction of EU fiscal rules that limit budget deficits and debt.

“It is not just doom and gloom in Europe — the recovery is coming,” said Alfred Kammer, European director of the IMF, earlier this week. “But there are challenges and there is no room for complacency,” he added, emphasizing that Eurozone growth would remain “insufficient.”

The IMF has urged Europe to remove internal trade barriers, deepen capital market integration to boost funding for high-growth firms, and invest in green energy, defense, and digitalization.

ECB executive board member Isabel Schnabel remarked at an event in Berlin that the Eurozone’s “increasingly poor” ability to generate growth was hindering its international competitiveness. “A glaring gap has opened up in IT-related real capital stocks between the Eurozone and the US,” she noted.