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Euro zone’s growth is expected to decrease due to recession in Germany

The EU Commission forecasts slower euro zone growth this and next year as inflation is rising and Germany slips into recession.

Nevertheless, the European Commission, based on GDP and inflation data from the five largest euro zone economies, states that the euro zone GDP will grow by 0.8% in 2023 and by 1.3% in 2024. The same forecast made in May suggested growth of 1.1% and 1.6%, respectively.

Weakness in domestic demand, in particular consumption, shows that high and still increasing consumer prices for most goods and services are taking a heavier toll than expected in the spring forecast.

The Commission also noted that the weakening comes “despite declining energy prices and an exceptionally strong labour market, which has seen record low unemployment rates, continued expansion of employment, and rising wages.”

The Commission forecasts a further increase in consumer inflation by 5.6% in 2023 and by 2.9% in 2024. To stop record price spikes, the European Central Bank has been raising rates from mid-2022, which negatively affects the economy by making credits more expensive.

The sharp slowdown in the provision of bank credit to the economy shows that monetary policy tightening is working its way through the economy.

The EU Commission also forecasts that Germany, Europe’s largest economy, will contract by 0.4% this year. Taking into account the changes in GDP and inflation in the euro zone countries over the past four months, next year the German economy will grow by 1.1% instead of the 1.4% expected in May.

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