Germany’s flailing economy dampens Eurozone’s economic oulook | Personal Finance | Finance

The European Commission (EC) has lowered its economic outlook due to expectations figures will be dragged down by the downturn in Germany’s economy.

A new report shows the German economy stagnated in the second quarter of 2023, following a decrease in real GDP of 0.1 percent in the first quarter.

Annually, the economy is now projected to shrink by 0.4 percent in 2023, marking a downward revision from the 0.2 percent growth first projected in the EC’s Spring Forecast.

Comparing it to the five other major economies in the group, which includes Spain, France, Italy, the Netherlands, and Poland, economists are labelling Germany the “sick man of Europe”, being the only major European nation to contract this year.

The growth forecast for the six largest economies in 2023 includes:

• Spain: 2.2 percent increase
• France: one percent increase
• Italy: 0.9 percent increase
• The Netherlands: 0.5 percent increase
• Poland: 0.5 percent increase
• Germany: -0.4 percent.

Updated projections show output across the bloc will now only rise by 0.8 percent this year, in contrast to the previous forecast of 1.1 percent.

Similarly, next year’s growth outlook has been reduced by an equivalent margin, now standing at 1.3 percent.

According to the EC’s report, the Summer Economic Forecast 2023, Germany’s economic contraction can be attributed to factors including real wage declines, weakened exports, and reduced public consumption resulting from the impact of Covid-19.

In 2024, real GDP is forecast to rebound by 1.1 percent driven by expectations that consumption will recover. However, this is still by a slightly lower margin than what was projected in spring, primarily due to a “slowdown” in the construction sector and less vigorous growth in exports.

Headline inflation in 2023 is expected to come down to 6.4 percent, implying a downward revision from the Spring Forecast, and to 2.8 percent in 2024, which is slightly higher than projected in the spring.

In the first half of 2023, energy and service price inflation fell more than expected. Nevertheless, service inflation is expected to remain “elevated” as wages rise.

Commenting on the report, Paolo Gentiloni, commissioner for economy said: “The EU avoided a recession last winter – no mean feat given the magnitude of the shocks that we have faced.

“However, the multiple headwinds facing our economies this year have led to a weaker growth momentum than we projected in the spring.”

In contrast, the EC conceded in its forecast that the UK has “held up better than previously expected”, despite energy prices and inflation being high.

However, it noted that while monetary policy continues to tighten amid “persistent inflationary pressures”, the outlook for trade, investment and productivity “remains weak”, and the growth projection for 2024 is also now lower.