Across the final use components of GDP, private consumption declined, reflecting weak dynamics of real disposable income amid high inflation, and tightening financing conditions, and despite robust employment growth. Amid negative carry-over effects from the monthly dynamics in the fourth quarter of 2022, survey indicators suggest that services supported growth in the first quarter of 2023. Industrial production started the year strongly, on the back of historically high order backlogs and the easing of supply bottlenecks, but fell sharply in March. 2 Real economyĮconomic activity in the euro area slightly declined in the first quarter of 2023, with consumption declining and net exports making a positive contribution amid declining energy imports (Chart 1). The uncertainty surrounding the staff projections continues to be high, which is reflected by the uncertainty bands surrounding the projections for growth and inflation (Charts 1 and 4). Historical data may differ from the latest Eurostat publications owing to data releases after the cut-off date for the projections. Notes: Real GDP figures refer to seasonally and working day-adjusted data. Growth and inflation projections for the euro area This is mainly due to a significant upward revision to HICP inflation excluding energy and food, reflecting revisions owing to higher than expected recent inflation outcomes and somewhat stronger unit labour costs, which more than offset the effect of the lower energy price assumptions and tighter financing conditions. Compared with the March 2023 projections, headline inflation has been revised up slightly over the entire projection horizon. Overall, headline inflation is expected to decrease from 8.4% in 2022 to an average of 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. In addition, monetary policy should further dampen underlying inflation in the coming years. Nevertheless, profit margins, which expanded notably in 2022, are expected to act as a buffer against some of the pass-through of these costs in the medium term. Wage growth is expected to remain over double its historical average for most of the projection horizon, driven by inflation compensation and the tight labour market, as well as increases in minimum wages. As indirect effects from the past energy price shocks and other pipeline price pressures gradually fade, driving the expected decline, labour costs will become the dominant driver of HICP inflation excluding energy and food. Nevertheless, HICP inflation excluding energy and food is projected to overtake headline inflation in the near term and to remain above it until early 2024, though following a gradual downward path from the second half of this year. With energy inflation set to become increasingly negative throughout 2023 and food inflation moderating sharply, headline inflation is expected to continue its decline to stand at around 3% in the last quarter of the year. Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is proving to be more persistent than previously expected, despite falling energy prices and easing supply bottlenecks. GDP growth in 2025 remains unchanged, as these effects are expected to be partly offset by the impact of higher real disposable income and lower uncertainty. Compared with the March 2023 ECB staff projections, the outlook for GDP growth has been revised down by 0.1 percentage points for 20, reflecting mainly tighter financing conditions. Overall, annual average real GDP growth is expected to slow down to 0.9% in 2023 (from 3.5% in 2022), before rebounding to 1.5% in 2024 and 1.6% in 2025. Together with the gradual withdrawal of fiscal support, this will weigh on economic growth in the medium term. Although the ECB’s monetary policy tightening will increasingly feed through to the real economy, the dampening effects from tighter credit supply conditions are expected to be limited. Furthermore, real incomes are set to improve, underpinned by a robust labour market, with unemployment hitting new historical lows. The economy is expected to return to growth in the coming quarters as energy prices moderate, foreign demand strengthens and supply bottlenecks are resolved, allowing firms to continue to work through their significant order backlogs, and as uncertainty – including that related to the recent banking sector stress – continues to recede. Euro area economic activity slightly declined at the turn of the year, but has remained relatively resilient to the large negative supply shocks that have been hitting the economy.
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