Introduction

Germany’s economy will shrink this year as part of a wider eurozone slowdown triggered by higher inflation and rising interest rates, according to the European Commission.

Key Points

• Germany’s economy is expected to contract by 0.4% in 2023, making it the worst-affected major country in the eurozone.
• Three months ago, the commission was forecasting a growth of 0.2% for Germany this year.
• The eurozone economy is now expected to expand by 0.8% in 2023, down from the previous forecast of 1.1%.
• Growth in 2024 has been revised down from 1.6% to 1.3%.
• The European Central Bank may halt its tightening of policy due to the downbeat economic forecasts.
• Growth in the 27-country EU for 2023 has also been revised down from 1% to 0.8%.
• Inflation in the eurozone is expected to average 5.6% in 2023, compared to 5.8% in the spring.

Impact on the Economy

The commission stated that weaker consumer spending has had a more significant impact on Germany’s economy than anticipated.

While France and Spain have seen modest improvements in their growth prospects, the overall eurozone economy is expected to experience a slowdown.

The provision of bank credit has sharply declined, indicating that higher interest rates are affecting the economy.

European Central Bank’s Response

The downbeat economic forecasts increase the likelihood of the European Central Bank calling a halt to its steady tightening of policy.

The bank has gradually raised its key interest rate from -0.5% to 3.75% in nine successive jumps.

EU Commissioner’s Statement

Paolo Gentiloni, the EU commissioner for economy, acknowledged the challenges faced by the EU economies this year.

He emphasized the need for “prudent, investment-friendly” tax and spending policies to work alongside central bank efforts to control inflation.