Similar upward revisions for the euro area are now projected at GDP growth rates of 1.1 per cent and 1.6 per cent in 2023 and 2024, respectively. Persistent core price pressures have resulted in a higher inflation revision, expected to reach 5.8 per cent in 2023 and 2.8 per cent in 2024 within the euro area.

The decrease in energy prices has had a significant impact on the positive growth outlook. Preliminary estimates from Eurostat indicate that GDP grew by 0.3 per cent in the EU and 0.1 per cent in the euro area in Q1 2023, with indicators suggesting continued growth into Q2.

Despite Russia's ongoing conflict with Ukraine, the European economy has successfully navigated the energy crisis due to a swift diversification of supply and a substantial reduction in gas consumption. These lower energy prices are gradually making their way through the economy, decreasing production costs for companies, and reducing energy bills for consumers, the European Commission said in a press release.

However, due to high inflation, financing conditions are expected to tighten further. This could slow down investment growth, particularly in residential investment, as the ease and cost of credit access are likely to be impacted by recent financial sector turbulence.

Core inflation, excluding energy and unprocessed food, reached a historic high of 7.6 per cent in March but is expected to gradually decline over the forecast horizon. On an annual basis, core inflation in the euro area in 2023 is set to average 6.1 per cent, before falling to 3.2 per cent in 2024.

The EU labour market continues to remain resilient despite the economic slowdown. Unemployment rates hit a record low of 6 per cent in March 2023, and participation and employment rates are at record highs.

The EU government deficit fell further to 3.4 per cent of GDP in 2022 due to strong nominal growth and the unwinding of residual pandemic-related measures. In 2023 and 2024, lower energy prices should facilitate further deficit reductions.

However, economic outlooks face increased downside risks. More persistent core inflation could continue to impact households' purchasing power and prompt a stronger response from monetary policy. Additionally, renewed financial stress could trigger further tightening of lending standards, the release added.

On the positive side, more benign developments in energy prices could lead to a faster decline in headline inflation, positively impacting domestic demand. However, uncertainty remains due to Russia's ongoing invasion of Ukraine.

Fibre2Fashion News Desk (KD)