The European Union’s executive body raised its economic growth forecast, saying Europe had dodged a winter recession that was feared amid an energy crisis but warning that stubbornly high inflation is likely to keep hurting the economy by sapping people’s ability to spend, according to AP News.
The outlook for the 20 countries using the euro currency improved to growth of 1.1% this year from 0.9% in the previous predictions in February, the European Commission said in its spring forecast Monday.
The European economy “is holding up remarkably well in the face of Russia’s aggression against Ukraine,” said commission Executive Vice President Valdis Dombrovskis in a statement.
Europe had faced expectations of a winter energy catastrophe after Russia cut off most supplies of natural gas to the continent amid the war in Ukraine. Prices surged to record highs for gas needed to heat homes, generate electricity and power factories — spurring painful spikes in consumer prices.
A mad scramble to line up new sources of natural gas — through more expensive supplies of liquefied gas coming by ship — along with a mild winter and reduced use helped Europe get through the winter without a major energy crisis.
Dombrovskis, however, cautioned that ”core inflation remains persistently high, which could erode people’s purchasing power, slow investment growth and impede access to credit.”
Core inflation excludes volatile food and fuel prices and is considered a better measure of price pressures in the economy than the overall figure, which reached an annual 7% in April.
Europe’s economy faces persistent challenges from spikes in consumer prices and rising interest rates that the European Central Bank is using to try to return inflation to the bank’s target of 2%. The economy barely scraped out 0.1% growth in the first three months of the year.
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.
An additional challenge comes from recent turmoil mostly affecting banks in the U.S., where three financial institutions have collapsed in recent months.
While European officials say their banks are not directly exposed to the U.S. 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 U.S. 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.