Spring 2023 Economic Forecast: an improved outlook amid persistent challenges (2023)

Over the past winter, the EU economy performed better than expected. As the disruptions caused by the war in Ukraine and the energy crisis clouded the outlook for the EU economy, and monetary authorities around the world embarked on a forceful tightening of monetary conditions, a winter recession in the EU appeared inevitable last year. The Autumn 2022 Forecast had projected the EU economy to contract in the last quarter of 2022 and the first quarter of 2023. Instead, latest data point to a smaller-than-projected contraction in the final quarter of last year and positive growth in the first quarter of this year. The better starting position lifts the growth outlook for the EU economy for 2023 and marginally for 2024. Compared to the Winter 2023 interim Forecast,

EU GDP growth is revised up to 1.0% in 2023 (from 0.8%) and 1.7% in 2024 (from 1.6%), virtually closing the gap with potential output by the end of the forecast horizon (see Special Issue I.4.1). Upward revisions for the euro area are of a similar magnitude, with GDP growth now expected at 1.1% and 1.6% in 2023 and 2024 respectively. Inflation also surprised again to the upside, and it is now expected at 5.8% in 2023 and 2.8% in 2024 in the euro area, respectively 0.2% and 0.3% higher than in winter.

Model-based analysis suggests that the improved outlook is driven by the terms-of-trade countershock caused by declining energy prices, while broad price-increasing supply-side factors lead to inflation persistence (see Box I.2.4). Recent economic developments seem to corroborate these results. According to Eurostat’s preliminary flash estimate, in 2023-Q1 GDP grew by 0.3% in the EU and by 0.1% in the euro area, a notch above the Winter interim Forecast projections. Lower energy prices, abating supply constraints, improved business confidence and a strong labour market underpinned this positive outcome. As for inflation, the headline index continued to decline in the first quarter of 2023, amid sharp deceleration of energy prices, but core inflation firmed, pointing to persistence of price pressures. For the second quarter, survey indicators suggest continued expansion, with services clearly outperforming the manufacturing sector and consumer confidence continuing its recovery from last autumn’s historical low.

The EU weathered the energy crisis well thanks to the rapid diversification of supply and a sizeable fall in consumption (see Box I.2.1). As the EU approaches the gas-refilling season, gas storage levels are at comfortable levels and risks of shortages during next winter have considerably abated. Further supply diversification and the accelerated increase in renewable power generation are expected to allow the EU to continue replacing fossil-based sources, including gas, while reducing the likelihood of renewed price pressures.

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At the cut-off date of this forecast, wholesale gas prices were projected to be 25% and 13% lower in 2023 and 2024 respectively, compared to markets’ expectations at the time of the previous Commission forecast. Oil prices were also expected to be 10% lower, compared to early February, in both 2023 and 2024.

The sharp deterioration of terms of trade in 2021 and 2022, as energy (imported) prices surged, resulted in a transfer of purchasing power from the EU to the rest of the world. With energy prices rapidly falling, the expected improvement in terms of trade over the forecast horizon will drive a reversal of this effect, to the benefit of all domestic sectors of the economy – households, corporates and governments. So far, households and public finances have taken a large part of the brunt of high imported inflation, as employment growth only partially offsets the fall in real wages and public finances set out to protect households and corporations from the adverse impact of high energy prices. Companies have been generally successful in passing on higher production costs to consumers (see Box I.2.3). However, the most energy-intensive sectors and companies have been struggling. Going forward, households are set to see their real disposable incomes finally increase in 2024, while falling energy prices allow governments to contain the cost of support measures or phase them out altogether.

The progressive firming of core inflation has set EU monetary authorities on a path of more forceful monetary tightening. In its meeting of 5 May – i.e. shortly after the cut-off of this forecast – the ECB Governing Board lifted policy rates by 25 basis points, down from 50 basis points in the previous two rounds of policy hikes. This was largely anticipated by market agents. At the cut-off date of this forecast, the euro area short-term rate was expected to peak at 3.8% in 2023-Q3, before abating in the course of 2024. Long-term interest rates have hardly moved. Tighter monetary conditions are feeding through the credit channel: borrowing costs are increasing, while credit flows are decreasing. The collapse of Silicon Valley Bank and two other US banks and the problems with Credit Suisse compound with the effects of higher policy rates. While well-capitalised and thoroughly supervised, EU banks’ declining risk tolerance is expected to lead to a further tightening of lending standards. As usual, projections about interest rates underpinning this forecast reflect market expectations at the time of the forecast. Moreover, this forecast assumes an orderly adjustment of the financial sector to higher policy rates, while risks stemming from exposures to households and corporates are assumed to be manageable (see Box I.1.1). While bankruptcies increased significantly towards the end of last year, the surge largely reflects a clearing of the insolvency backlog created by support schemes during the pandemic and country-specific developments related to changes in insolvency regulations (see Box I.2.2).

The tightening of financing conditions is expected to weigh on investment over the forecast horizon.

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Housing investment, which is particularly sensitive to interest rates, is set to contract. By contrast, business investment is projected to still increase, though at a slower pace than last year, helped by corporates’ overall healthy balance sheet position. Finally, public investment is forecast to remain buoyant in both 2023 and 2024 thanks to the continued deployment of the Recovery and Resilience Facility (RRF). Overall, investment growth is projected to decelerate markedly from 4% in 2022 to 0.9% in 2023. Gradual normalisation of economic activity is expected to reinvigorate companies’ investment decisions, pushing overall investment growth up by 2.1% in 2024.

Inflation keeps eroding the purchasing power of consumers. Following the fall in the last quarter of 2022, private consumption is expected to have weakened again in the first quarter of this year. Overall, private consumption growth in the EU in 2023 is projected at 0.5%. As inflation loosens its grip on households’ budgets, private consumption is set to rebound to 1.8% in 2024. The household saving rate is projected to decrease in the EU from 13.2% in 2022 to 12.8% in 2024, in line with its long-term average.

The slower pace of economic expansion in the EU is set to have a limited impact on the EU labour market. Continued labour market tightness, labour hoarding due to skill shortages as well as strong demand, especially for services, are expected to cushion the impact of the economic slowdown on the labour market.

Employment growth is still forecast at 0.5% in the EU this year. In 2024, employment is set to keep growing moderately (0.4%), implying a less job-rich growth than in 2022. The unemployment rate is expected to remain close to its historical low, at 6.2%, in the EU in 2023, before edging down to 6.1% in 2024.

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After growing by 5.0% in 2022, the annual growth rate of compensation per employee is projected to increase to 5.9% in 2023 before falling to 4.6% in 2024. This means that real wages are still set to decrease this year, though a slight pick-up in real wages is expected towards the end of the year.

Sharply lower natural gas prices are making their way to retail prices of gas and electricity, though at varying speeds across EU Member States. At the same time, all other major inflation subcomponents (processed and unprocessed food, non-energy industrial goods and services) have seen their annual inflation rate increase between December and March. Consequently, core inflation (headline excluding energy and unprocessed food) continued to rise in early 2023, to a historical high of 7.6% in March, and core goods and services replaced energy as the primary driver of headline inflation in the EU. Recent indications on managers’ selling price expectations from business surveys and other indicators corroborate the projection of core inflation having peaked in the first quarter. Core inflation is projected to decline gradually as profit margins absorb higher wage pressures and tighter financing conditions prove effective. Average core inflation in 2023, at 6.9% in the EU, is set to exceed that in 2022, before falling to 3.6% in 2024, above headline inflation in both forecast years.

The economic expansion and reduced pandemic-related emergency measures supported the further reduction of the EU government deficit in 2022, to 3.4% of GDP, despite the expansionary fiscal stance driven by sizeable energy support measures.

In 2023 and especially in 2024, the phasing out of energy support measures is expected to drive further deficit reductions on aggregate in the EU, to 3.1% and 2.4% of GDP,

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respectively, and the corresponding fiscal impulse should turn contractionary. However, several Member States are still projected to see a deterioration in their general government balance in 2023, as their fiscal stance remains expansionary. While falling energy prices are helping to contain the cost of existing support measures, several Member States have introduced new energy support measures or are extending existing ones. Furthermore, while inflation supported the improvement in the government balance ratio in 2022, some reversal of this effect is expected in 2023 as large expenditure items like pensions and other social transfers, as well as public wages, are adjusted to the previous’ year inflation. In 2024, on account of unchanged policies, the deficit reduction is set to be broad-based across countries. Meanwhile, the EU aggregate debt ratio is expected to fall in 2023-24 despite debt-increasing primary deficits, thanks to economic growth and inflation. Higher interest rates are affecting the cost of servicing public debts only gradually thanks to their long maturity.

The EU debt-to-GDP ratio fell to around 85% of GDP in 2022, from the record high of 92% recorded in 2020. It is projected to further decline to below 83% of GDP in 2024, but to remain above the pre-COVID-19 crisis level of around 79% in 2019.

Global growth, excluding the EU, is expected to fall from 3.2% in 2022 to 3.1% in 2023, before rising back to 3.2% in 2024, broadly unchanged since the Winter interim Forecast. The outlook for external demand facing the EU has however been significantly downgraded, as synchronised weakness in advanced economies (and especially in the US) weighs heavily on EU exports. The rebound in economic activity in China, moreover, is set to benefit primarily the domestic sectors, services in particular, with limited positive spillovers to the EU. Still, net external demand is expected to contribute positively to GDP due to weak import dynamics – especially for goods in 2023. The current account balance is set to improve steadily from the record-low surplus of 1.6% of GDP in 2022 to 3.5% in 2024. The improvement is mainly driven by the merchandise trade balance, which is forecast to turn positive this year and improve further next year, largely as a consequence of falling import prices. The services trade balance is forecast to remain strong throughout the forecast horizon, with tourism being a strong driver of the economic rebound. This publication includes for the first time an overview of the economic structural features, recent performance and outlook for Ukraine, Moldova and Bosnia and Herzegovina, which were granted candidate status for EU membership by the Council in June 2022 and December 2022 (see Special Issue I.4.2).

While the outlook in our central scenario has not changed much since last winter, downside risks to the economic outlook have increased. Persistence of core inflation has emerged as a key risk. It could continue restraining the purchasing power of households and force a stronger response of monetary policy, with broad macro-financial ramifications. Moreover, a surge in risk aversion in financial markets, following the banking sector turmoil originated in the US, could prompt a more pronounced tightening of lending standards than assumed in this forecast. In this context, policy consistency has become even more important. An expansionary fiscal policy stance would fuel inflation further, leaning against monetary policy action. In energy markets, the threat of outright supply shortages for next winter has significantly abated, but the evolution of prices remains highly uncertain. More benign developments in energy prices would lead to a faster decline in headline inflation, with positive spillovers on domestic demand. Risks related to EU’s external environment remain unusually elevated, with new uncertainties following the banking sector turbulence or related to wider geopolitical tensions. Finally, there is persistent uncertainty stemming from Russia’s ongoing invasion of Ukraine.

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What is the future economic outlook for 2023? ›

Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent.

What is your opinion prediction for the US economy in 2023? ›

In 2023, economic activity is projected to stagnate, with rising unemployment and falling inflation. Interest rates are projected to remain high initially and then gradually decrease in the next few years as inflation continues to slow.

What are the top economic trends for 2023? ›

Inflation rates will decline markedly in 2023 but remain higher than the market anticipates. The Fed will slow its tightening cycle and eventually stop hiking rates during 2023, but its policy rate will remain higher for longer than expected. The US economy will decelerate into a recession.

What is the economic outlook for 2024? ›

UNITED NATIONS, May 16 (Reuters) - Global economic growth is projected to be 2.3% in 2023, up 0.4 percentage points from a January forecast, and the prediction for 2024 has dropped 0.2 percentage points to 2.5%, according to a United Nations report released on Tuesday.

Which is the fastest-growing major economy in 2023? ›

India to emerge as the fastest-growing economy in 2023, ahead of China and the US.

Which will be the world's fastest-growing economy in 2023? ›

2023 Growth Percentage Change: 5.9%

India's GDP grew by 8.7% in 2021, reaching $3.1 trillion, making it the fastest-growing major economy in the world. Furthermore, India's per capita income has doubled in the last decade, and poverty rates have declined significantly.

What will the economic conditions be like in 2023? ›

Global trade remains under pressure due to geopolitical tensions, weakening global demand and tighter monetary and fiscal policies. The volume of global trade in goods and services is forecast to grow by 2.3 per cent in 2023, well below the pre-pandemic trend.

Is a recession coming in 2023? ›

A majority of economists forecast a recession for the U.S. in 2023 – 58 percent, according to a survey from the National Association for Business Economics (NABE) released earlier this week on March 27.

Is there a recession coming in 2023 in USA? ›

Geopolitical tensions, energy market imbalances, persistently high inflation and rising interest rates have many investors and economists concerned that a U.S. recession is inevitable in 2023. The risk of recession has been rising as the Federal Reserve has raised interest rates in its ongoing battle against inflation.

What is causing inflation 2023? ›

It has been attributed to various causes, including pandemic-related economic dislocation, supply chain problems, the fiscal and monetary stimuli provided in 2020 and 2021 by governments and central banks around the world in response to the pandemic, and price gouging.

Who has the strongest economy in the world 2023? ›

United States of America

What is the inflation rate for 2023? ›

Current US Inflation Rates: 2000-2023
ElementAnnual Inflation Rate
7 more rows

How long will 2023 recession last US? ›

In a best-case scenario, the U.S. will likely see a 'soft landing' with low/slow growth across 2023 before picking up in 2024. However, a downside scenario is a real possibility and could see the U.S. enter a prolonged recession lasting well into 2024, as is currently forecast for the UK and Germany.

Will there be a recession in 2023 or 2024? ›

In FTI Consulting's recently released 2023 U.S. Loan Market Survey, bank and non-bank lenders provided the most cautionary outlooked recorded in the survey's five-year history.

Will the US have a recession in 2023 or 2024? ›

By April 2024, it is projected that there is probability of 68.22 percent that the United States will fall into another economic recession. This is an increase from the projection of the preceding month where the probability peaked at 57.77 percent.

What are the top 5 fastest growing economy? ›

The World's Fastest Growing Economies
  1. Guyana. Average growth 2022-2026: 25.8% Guyana will be by far the fastest-growing economy over the next few years. ...
  2. Macao. Average growth 2022-2026: 11.9% ...
  3. Fiji. Average growth 2022-2026: 7.7% ...
  4. Niger. Average growth 2022-2026: 7.6% ...
  5. Libya. Average growth 2022-2026: 6.9%
3 days ago

Which country witnessed highest economic growth in 2023? ›

In emerging economies, China's growth has accelerated since the economy fully opened from its “zero-COVID-19” policies, while India is predicted to be the fastest-growing major economy in the world in 2023; inflation in emerging markets eased, especially in Brazil (exhibit).

Which economies will grow the most? ›

China, Vietnam, Uganda, Indonesia, and India are projected to be among the fastest-growing economies to 2030. That is the conclusion of researchers at the Growth Lab at Harvard University who presented new growth projections in the Atlas of Economic Complexity.

How do you prepare for a recession? ›

Preparing for a recession comes down to using strong economic times to your benefit. Focus on limiting your spending, forming a budget, building an emergency fund and eliminating high-interest debts.

What triggers a recession? ›

It's hard to pinpoint exactly what causes a recession. But some factors that might contribute to recessions include economic shocks, stock market crashes, fiscal and monetary policy, asset bubbles bursting and psychological factors. According to the Department of Labor, recessions are hard to predict.

How long does a recession last? ›

Recessions over the last half a century have ranged from 18 months to just two months. Federal Reserve economists believe the next downturn may stick around for longer than usual.

Is it good to buy a house during a recession? ›

During a traditional recession, the Fed will usually lower interest rates. This creates an incentive for people to spend money and stimulate the economy. It also typically leads to more affordable mortgage rates, which leads to more opportunity for homebuyers.

Is a recession coming in 2023 April? ›

We expect a recession in 2023, and while incoming data for the first quarter have shown a resilient economy thus far, there have been signs of slowing activity.

How to prepare for a depression 2023? ›

Recession 2023: How to prepare
  1. Create an emergency fund. An emergency fund is an essential tool for managing financial risk and uncertainties. ...
  2. Cut down on expenses. ...
  3. Plan your future finances. ...
  4. Learn new skills. ...
  5. Look for additional sources of income. ...
  6. Avoid panicking. ...
  7. Hire a financial advisor.
Feb 3, 2023

Do prices go down in a recession? ›

In a deflationary recession, prices fall while the economy contracts. Various factors, such as a decrease in the money supply or an increase in production, can cause this. A deflationary recession can be challenging to manage because it can lead to lower interest rates and higher unemployment.

Will food prices go down in 2023? ›

Food prices are expected to grow more slowly in 2023 than in 2022 but still at above historical-average rates. In 2023, all food prices are predicted to increase 6.2 percent, with a prediction interval of 4.9 to 7.5 percent.

How to survive inflation 2023? ›

  1. High inflation means you might have to make changes to your spending, saving and investing habits. ...
  2. Lock in today's high interest rates for your cash savings. ...
  3. A diversified investment portfolio is important during times of high inflation. ...
  4. Make sure to keep your emergency fund stocked when inflation is high.

Who benefit from inflation? ›

Collectors. Historically, collectibles like fine art, wine, or baseball cards can benefit from inflationary periods as the dollar loses purchasing power. During high inflation, investors often turn to hard assets that are more likely to retain their value through market volatility.

Which country is the richest in the world? ›

Here is the full ranking of the richest countries in 2023, according to their per capita GDP. Luxembourg, one of the smallest countries in the EU has a population of 634,000 and is the richest country in this ranking with a per capita GDP of nearly $130,000.

Which country will have the best economy in the future? ›

Emerging markets (E7) could grow around twice as fast as advanced economies (G7) on average. As a result, six of the seven largest economies in the world are projected to be emerging economies in 2050 led by China (1st), India (2nd) and Indonesia (4th)

Which country has best economic condition? ›

The economic strength of a country is determined by its gross domestic product (GDP). In other words, the amount of all income generated in the country from the sale of goods and services. With a GDP of 23.32 trillion dollars, the USA is by far the world's largest economy in this ranking for 2021.

What is the predicted inflation rate for 2023 and 2024? ›

Projected annual inflation rate in the United States from 2010 to 2028*
CharacteristicInflation rate
9 more rows
Apr 20, 2023

What is the projected inflation rate for the next 5 years? ›

US Expected Change in Inflation Rates: Next 5 Years is at 3.10%, compared to 3.00% last month and 3.00% last year. This is lower than the long term average of 3.20%.

What is the inflation forecast for 2023 to 2026? ›

The figure shows the expected inflation rates on a global average for the years 2023 (7%), 2024 (5.9%) and 2026 (5%).

Can a recession be avoided in 2023? ›

While inflation is still high, a downward trajectory is good news for the Federal Reserve. Moderating inflation and a strong labor market may mean that no recession will come in 2023.

Why is everyone predicting a recession in 2023? ›

Many economists and investors had a clear narrative coming into 2023: The Federal Reserve had spent months pushing borrowing costs rapidly higher in a bid to tame inflation, and those moves were expected to slow growth and the labor market so much that the economy would be at risk of plunging into a downturn.

How close are we to a recession? ›

Gross Domestic Product (GDP)

This comes on the heels of 3.2% annualized growth in the third quarter of 2022. The report sets overall 2022 U.S. economic growth at 2.6%, which makes it pretty clear that the U.S. was not in a recession in 2022.

What would a Great Depression look like? ›

The Great Depression began in 1929 when, in a period of ten weeks, stocks on the New York Stock Exchange lost 50 percent of their value. As stocks continued to fall during the early 1930s, businesses failed, and unemployment rose dramatically. By 1932, one of every four workers was unemployed.

Is a recession good or bad? ›

Recessions have plenty of negative consequences, but they can provide a necessary reset for the markets. Higher interest rates that often coincide with the early stages of a recession provide an advantage to savers, while lower interest rates moving out of a recession can benefit homebuyers.

What is the difference between a recession and a depression? ›

A recession is a downtrend in the economy that can affect production and employment, and produce lower household income and spending. The effects of a depression are much more severe, characterized by widespread unemployment and major pauses in economic activity.

What happens to GDP during a recession? ›

In particular, a recession is usually associated with a decline of 2 percent in GDP. In the case of severe recessions, the typical output cost is close to 5 percent. The fall in consumption is often small, but both industrial production and investment register much larger declines than that in GDP.

How long did the recession last in 2008? ›

The Great Recession lasted from roughly 2007 to 2009 in the U.S., although the contagion spread around the world, affecting some economies longer. The root cause was excessive mortgage lending to borrowers who normally would not qualify for a home loan, which greatly increased risk to the lender.

How big is the US economy in dollars? ›

$26.854 trillion (nominal; 2023 est.) $26.854 trillion (PPP; 2023 est.)

What phase of the business cycle are we in 2023? ›

The United States is in the late-cycle expansion phase with a rising likelihood of recession in 2023.

Which country has the best economy 2023? ›

United States of America

How long will 2023 recession last? ›

In a best-case scenario, the U.S. will likely see a 'soft landing' with low/slow growth across 2023 before picking up in 2024. However, a downside scenario is a real possibility and could see the U.S. enter a prolonged recession lasting well into 2024, as is currently forecast for the UK and Germany.

Is 2023 a good year for business? ›

Despite some recent gloomy headlines from Silicon Valley and Wall Street and some painful downturns in the stock market, there are strong signs that 2023 might be an even better year for entrepreneurs to start a business — especially in the online small business space.

What happens to food prices in a recession? ›

Because people have less money to spend, demand falls, taking the prices of many goods and services with it. Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same.

What should you avoid during a recession? ›

Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it's better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.

Which country will be rich in future? ›

Top 10 Richest Countries in the World, 2050 are China, United States, Canada, United Kingdom, Brazil, Germany, France, Mexico, United States, India.

Which economies will be the most powerful in 2025? ›

In this future China, different areas will dominate their economic landscape and there will be new winners and losers. Although the days of China's 10% growth rate may be over, by 2025 its economic development will remain the most powerful.


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