The latest economic growth forecasts from the European Commission show the impact that the cost-of-living crisis and higher interest rates are having on growth. The EU economy will expand by just 0.8 per cent this year and 1.4 per cent in 2024, it predicts, a cut from the previous forecast. The economy has lost momentum, the commission finds, with activity stalling and signs that further weakness lies ahead. A fall in manufacturing activity is affecting Germany in particular, as is lower demand in China.
The forecasts come ahead of a key decision on Thursday by the European Central Bank on whether to increase interest rates for the 10th time since the summer of 2022. Market analysts are divided on what the ECB will do – a 0.25 point rise in its key rates is possible, but the central bank could also decide to make no change this time, while making clear that it stands ready to do so if needed at a subsequent meeting.
If anything, the latest forecasts from the commission sharpen this dilemma. On one side it points to weaker economic conditions and now estimates that growth in the euro zone was just 0.1 per cent in the second quarter.
However, it also shows that inflationary pressures will remain persistent. The commission does predict that inflation will fall to 6.5 per cent this year, slightly below its previous estimate, but it forecasts that it will remain at 3.2 per cent next year, still well above the ECB’s target of 2 per cent.
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Having increased interest rates at an unprecedented speed since last summer, the ECB should not push them higher again this Thursday. It needs to hold off until there is clearer evidence of the impact of the increases which have taken place so far, which typically take time to feed through to euro-zone economies.
For borrowers, it now appears likely that interest rates are at or close to their peak. When they might start to fall is uncertain. But if economic weakness persists in Europe next year, pressure for reductions will build.