Thomas Lyons 
The European Union’s executive body, the European Commission, has released its spring forecast, raising its economic growth forecast for the euro currency zone to 1.1% this year from the previous prediction of 0.9% in February. The Commission credits Europe’s ability to avoid a winter recession despite the energy crisis caused by Russia’s aggression against Ukraine. Executive Vice President Valdis Dombrovskis said that the European economy is “holding up remarkably well” despite the challenges posed by the gas shortage. The Commission’s forecast signals that the European economy is in better shape than previously thought.
The winter energy crisis caused by Russia’s cut-off of natural gas supplies to Europe was expected to have a devastating impact on the European economy. Prices for gas skyrocketed, leading to painful spikes in consumer prices. However, a mild winter and reduced use, combined with a scramble to line up new sources of natural gas, helped Europe get through the winter without a crisis. The use of more expensive supplies of liquefied gas coming by ship also helped.
Despite Europe’s ability to avoid a winter recession, the European Commission warns that the European economy still faces persistent challenges from inflation and rising interest rates. Core inflation, which excludes volatile food and fuel prices, remains persistently high. This could erode people’s purchasing power, slow investment growth and impede access to credit. The overall figure reached an annual 7% in April. The European Central Bank is using rising interest rates to try to return inflation to the bank’s target of 2%. However, higher borrowing costs for consumers and businesses have been reducing the availability of loans for home purchases or business investment and shrinking the demand for loans.
Another challenge facing the European economy comes from recent turmoil, mostly affecting banks in the US, where three financial institutions have collapsed in recent months. While European officials say their banks are not directly exposed to the US troubles, increased scrutiny of bank finances from regulators and shareholders may make banks even more reluctant to lend. Banks are the chief sources of financing for companies in Europe, in contrast to the US where financial markets supply the bulk of credit.
The European Commission’s economic growth forecast for next year was raised to 1.6% from 1.5% in the earlier projection. The Commission’s forecast provides some optimism for the European economy, which has been facing significant challenges in recent years. Despite the challenges posed by Russia’s aggression against Ukraine, the European economy has shown resilience and is on track for modest growth. However, the persistent challenges posed by inflation and rising interest rates, as well as the potential impact of increased scrutiny of bank finances, mean that the European economy still faces significant challenges in the years ahead.
