Brussels worsens European economic forecasts weighed down by Germany

Two workers on a BMW assembly line in Bavaria, Germany.Leonhard Simon (Getty Images)

Germany remains sick and Europe suffers.

The first European economy will once again touch flat behavior this year and that will weaken the activity of the euro zone and the EU as a whole more than expected, which, respectively, will barely grow by 0.8% and 0.9%, according to the forecasts released by the European Commission.

For months now there has been talk that Europe will experience an era of stagnation, but the numbers released this Thursday accentuate it by 2024. That France or Spain, which will grow 1.7% this year, have better performance is not enough to compensate for the German ballast.

The conclusions of this review of the forecasts made by the Commission - the winter predictions are a mere update of the autumn work - are very similar to those seen in the first estimates on economic activity in 2023: weakness and stagnation without reaching to fall into recession, despite flirting with it, because countries like Spain or Italy somewhat compensate for Germany's poor performance.

“Significant EU stagnation through 2023 translated into weak momentum entering the new year.

[…] Thus, the EU economy entered 2024 in a weaker situation than expected, and the latest indicators do not suggest an imminent rebound.”

The first sentences of the report on the economic forecasts for this year and the next from the Union Executive describe very clearly what is expected for the coming months and anticipate that it has lowered its growth forecasts: four tenths in 2024 and one tenth in 2025, a year in which a rebound, still weak, of 1.5% is expected.

For inflation, the predictions are better.

The expected average CPI for the euro zone in 2024 is 2.7%, five tenths less than in the autumn report.

The price of the raw materials with which energy is produced, mainly gas, has sunk compared to what happened in the first year of Russia's aggression against Ukraine, and the conflict in Gaza has not changed that sign, at least for now.

And, furthermore, there is the very spiral that the European Central Bank (ECB) sought when raising interest rates: cooling the economy to weaken demand and ease pressure on prices.

There are uncertainties, such as the situation in the Red Sea, with the attacks on ships that cross this very busy commercial route, but the Commission's economists believe that despite them "inflation will fall in 2024 more quickly than expected in the forecasts of autumn.”

The ECB is also scanning this horizon, which reinforces the belief that Frankfurt will soon consider whether the time has come to loosen the noose on interest rates, which remain at 4.5%.

The German situation abounds along these lines.

In 2023 its economy contracted 0.3%.

For 2024, a somewhat better performance is expected, 0.3%.

But it is still an anemic fact.

Germany is caught between a failed energy bet with the Russian invasion of Ukraine, the new geopolitical scenario that leads to seeing China as a strategic rival and no longer as a commercial partner and, furthermore, that Asian giant to which Germany sold so much It no longer grows as it did.

With all this, in Brussels they believe that Germany will grow less this year than was expected just three months ago.

In this review of the numbers presented in autumn, the forecast for German activity this year has been reduced by five tenths, from a growth of 0.8% to 0.3%.

And that is very noticeable in the community club, in which this economy represents a quarter of the total.

“Investment growth is expected to remain low relative to pre-pandemic values ​​[...].

The labor shortage continues to be an obstacle to activity.

A trade-driven recovery is also not likely, since exports and imports will grow at practically the same rate,” the community technicians analyze.

When that happens, it is of little use for Spain to perform well: 1.7% can be considered that way, at least in a context as weak as that surrounding its main partners.

This prevents better data because, as the Commission points out in its report, it slows down exports.

However, tourism is expected to continue being an engine that drives Spanish growth.

The sectoral analysis does not separate much from the geographical one.

Industry is a very important sector in Germany, from which worse performance is expected.

On the other hand, the economic sentiment surveys that are observed to prepare the forecasts suggest better performance in services, an activity with greater prominence in Spain, for example.

Consumption, for its part, “continues to be weighed down by a high savings rate,” which would remain above pre-pandemic levels.

During Covid-19, European households increased their savings significantly, not least because economic restriction measures limited spending opportunities.

The situation turned around when prices skyrocketed.

Households dipped into their reserves to cushion the impact.

What would be happening now and could happen in the coming months, Brussels believes, is that the increase in rates will lead to consumption that requires credit (automobiles) being contained due to high interest rates and, in addition, families will return to think that we must rebuild the mattress “eroded by inflation.”

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