By Scott Kanowsky
Investing.com -- The European Commission has lifted its economic forecasts for the EU, saying the bloc will likely dodge a recession thanks in part to a dip in gas prices - but warned that inflationary headwinds remain persistently strong.
In its interim winter projections, the EU's executive arm said it now expects its 27 member states to expand by a combined 0.8% in 2023, up by 0.5 percentage points compared to its autumn forecast. The euro zone, which is made up of countries using the euro currency, is seen growing by 0.9%, an increase of 0.6 percentage points versus its prior estimate.
Meanwhile, EU gross domestic product expansion for 2022 is now estimated at 3.5%, 0.3 percentage points above the autumn projections.
Despite the lingering impact on key Russian energy inflows following the outbreak of the war in Ukraine last year, the EU Commission said there had been "favorable developments" since its previous outlook. Continued "diversification of supply sources and a sharp drop in consumption," along with a milder-than-anticipated winter, have allowed gas storage levels to remain above the seasonal averages of past years and pushed down wholesale gas prices.
The EU's labor market has also remained resilient, with the unemployment rate touching an all-time low of 6.1% at the end of last year, according to the announcement. Consumer and business confidence is improving as well, leading some surveys in January to suggest that the bloc may avoid a contraction in the first quarter of 2023.
"A better than previously expected turnout for growth at the end of last year and improving economic sentiment suggest that the EU economy is thus set to narrowly escape the technical recession that was projected back in autumn," said EU Economy Commissioner Paolo Gentiloni in a statement.
He added that, following the drop in energy prices, price growth has "peaked" and is on track to decline further. Headline inflation in the EU is projected to fall from 9.2% in 2022 to 6.4% in 2023 and 2.8% in 2024. The autumn estimates had placed the figure at 7.0% this year and 3.0% in 2024.
However, the EU Commission flagged that energy costs are still elevated on a relative basis, while core inflation - which excludes items like energy and unprocessed food - rose in January. As a result, the body foresees ongoing monetary tightening by the European Central Bank, arguing that this trend will weigh on business activity and exert a drag on investment.