Eurozone inflation to fall faster than expected

Inflation in the eurozone will continue to fall this year, according to the European Commission's latest economic forecast. One notable exception is Belgium, where the Commission expects inflation to rise in 2024.

Eurozone inflation will fall faster than expected in autumn 2023 and will continue to fall in 2024, the Commission said on Thursday. By the end of 2025, the Commission predicts inflation will be just above the European Central Bank's 2 per cent target. 

The stronger-than-expected fall in inflation last autumn was caused by a sharp fall in energy prices and weaker economic growth than expected, the Commission said. 

Inflation to rise in Belgium

This year the downward trend will be slowed by the phasing out of energy support measures by member states and trade disruptions in the Red Sea, but inflation will still fall.

Eurozone inflation will be 5.4 per cent in 2023 and fall to 2.7 per cent in 2024. By the end of next year, the Commission expects average price rises to reach 2.2 per cent.

The only exception is Belgium, where inflation is expected to rise

The only exception is Belgium, where the Commission expects inflation to rise in 2024. Inflation stood at 2.3 per cent in the country last year and is expected to rise to 3.5 per cent this year, before falling back to 2.3 per cent in 2025.

The fact that inflation is rising again only in Belgium is due to the expiry of various government measures aimed at cushioning the impact of rising energy prices, the Commission said.

Rate cuts likely this summer

With eurozone inflation having cooled considerably from its peak in 2022, there is a lively debate within the European Central Bank about when the central bank might start cutting interest rates again. 

Opinions range from a first cut in April to one in June. In January, the central bank's president, Christine Lagarde, said she thought a cut this summer was likely.

"Wage growth is expected to become an increasingly important driver of inflation dynamics"

There are still risks that inflation will pick up and policymakers need more certainty that price rises will indeed return to the 2 per cent target, Lagarde said in a speech to the European Parliament in Brussels on Thursday.

"Wage growth continues to be strong and is expected to become an increasingly important driver of inflation dynamics in the coming quarters," she said.

Wage developments this year will mainly depend on the outcome of ongoing or upcoming rounds of negotiations, which will have a major impact on the salaries of a large proportion of euro area workers, she said.

Commission cuts growth forecast

While the inflation forecast is more positive than expected, the European Commission has downgraded its eurozone growth forecast for this year from 1.2 per cent to 0.8 per cent. In 2025, the eurozone economy is expected to grow by 1.5 per cent.

"The European economy has left behind it an extremely challenging year," said Paolo Gentiloni, European Commissioner for Economy. 

"The rebound expected in 2024 is set to be more modest than projected three months ago"

In 2023, economic growth was held back by the erosion of household purchasing power, a sharp tightening of monetary policy, the partial withdrawal of fiscal support and falling external demand, the Commission said.

"The rebound expected in 2024 is set to be more modest than projected three months ago, but to gradually pick up pace on the back of slower price rises, growing real wages and a remarkably strong labour market,” said Gentiloni. 

Growth in Belgium

Belgium's economy is expected to grow by 1.4 per cent this year, according to forecasts by the country's Planning Bureau released on Thursday. This means Belgium is expected to perform significantly better than the eurozone as a whole.

From 2025 to 2029, however, growth in Belgium will be lower than in the eurozone as a whole, at 1.3 to 1.4 per cent per year.

The Planning Bureau also said that without policy changes, Belgium's government deficit would rise to 5.6 per cent by 2029, with government debt rising to 116.8 per cent of GDP over the same period.

(KOR)

^{Christine Lagarde, president of the European Central Bank © PHOTO KIRILL KUDRYAVTSEV / AFP}