Global Economic Outlook 2023: Euro Area Edition

Recession in the Short Term Gives Way to Weaker Growth in the Longer Term

Russia’s unjustified war in Ukraine has sharply deteriorated the European economic outlook for 2022 and 2023. Soaring energy prices pushing overall inflation to double digits, plummeted consumer confidence, and dented business activity amid reduced demand are likely to tip the Euro Area economy into recession by the end of 2022. More recently, the ECB’s decision to tighten its monetary policy has increased downside risks to the region’s growth prospects. 

Despite the myriad of headwinds faced by the European economy, the recession may be relatively shallow and short-lived, given a strong and resilient labor market and the relatively healthy balance sheets on the part of consumers and businesses. 

Beyond 2024, the economy is likely to return to its slowing trend growth rate trajectory. Key risks around the longer-term outlook are internal tensions regarding the Euro Area architecture with slow growth in Italy and Spain and a more challenging global environment both through shrinking foreign demand and overall geopolitical tensions particularly on its eastern flank.

Insights for What’s Ahead 

• Businesses should prepare for continued volatility, as the energy crunch is unlikely to abate soon and will eventually lead to slower growth over 2023. Reducing electricity and gas usage, investing in renewable energy and infrastructure, and improving energy efficiency and security (e.g., using on-site energy generation systems) can improve not only their overall environmental but financial performance too.  
• A recession may be inevitable but does not need to be deep and extremely damaging. Businesses should prepare for future growth, particularly as the energy transition evolves and supply chain disruptions eventually fade.Innovating their way out of crisis, prioritizing supply chain resilience and sustainability, and enhancing their investment strategies toward greener solutions are key drivers of business growth and overall economic prosperity in the years ahead. 
• Business leaders need to adjust to a changing Euro Area labor market. More flexible working arrangements, reskilling/upskilling opportunities to boost workers’ productivity, and a focus on the recruitment, retention, and retraining of older workers will be essential for business leaders operating in the Euro Area. 
• Even if income growth in the Euro Area is expected to underperform the global average, the Euro Area remains a large consumer market. The region accounts for about 10 percent of global spending on goods and services (in purchasing power parity terms), a share that is only slowly decreasing. 

For the full 10-year outlook with risks, and deeper insights for what’s ahead, click the "Download Research Report" button below.