Euro-Zone Soft Landing on Track But With Wider Deficit, EU Says

(Bloomberg) -- The euro-area economy is still headed for a soft landing, with inflation backpedaling more quickly than previously expected and growth picking up through next year, according to the European Commission.

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Gross domestic product will increase by 0.8% this year and 1.4% in 2025 — almost unchanged compared with the last set of forecasts three months ago, the EU’s executive arm said Wednesday in a report. It now sees inflation slowing to 2.5% and 2.1% this year and next — down from 2.7% and 2.2% previously.

“We expect a gradual acceleration in growth over the course of this year and next, as private consumption is supported by declining inflation, recovering purchasing power and continued employment growth,” Economy Commissioner Paolo Gentiloni said in a statement.

He warned, though, that “public debt is set to increase slightly next year, pointing to a need for fiscal consolidation while protecting investment.”

Officials forecast aggregate budget deficits of 3% in 2024 and 2.8% in 2025 — up from 2.8% and 2.7% before. While France and Italy are now seen facing bigger shortfalls, smaller ones are predicted for Germany and Spain.

  • Read More: Italy’s Deficit Seen by EU as Bleaker Than Meloni Reckons

Governments spent freely during the pandemic and the energy shock that followed Russia’s invasion of Ukraine, helping companies and households cope with the consequences. As a recovery takes hold, they should be more ambitious in consolidating their finances, the International Monetary Fund said this week.

The euro-zone economy started the year on a stronger footing than anticipated, growing 0.3% in the three months through March following a shallow recession in the latter half of 2023, data Wednesday confirmed. Even Germany, the continent’s main growth laggard, managed to expand by more than expected.

At the same time, inflation has been cooling as the supply shocks that plagued the region after the pandemic subsided. Lingering concerns at the European Central Bank center on rising salaries that could stoke domestic price pressures.

Officials are still on track to deliver a first interest-rate cut in June and will probably follow up with further steps later in the year. How much easing they deliver is up for debate, though investors are currently expecting about three cuts in 2024.

Lower borrowing costs should spur investment activity while reducing consumers’ incentives to save and boosting consumption, the commission said. By 2025, average real wages in the European Union will fully recover their 2021 levels, but not in all member states, according to the report.

The fortunes of various sectors in the economy have been unusually uneven, as services benefit from rising purchasing power among households while manufacturers reel from subdued global demand and high borrowing costs.

Over time, an “improved outlook for global merchandise trade should support EU’s external demand for goods, in turn helping to lift the prospects of the weakened manufacturing sector,” according to the commission.

--With assistance from Barbara Sladkowska and Jana Randow.

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