EU economy shows positive signs, but challenges remain amid Ukraine war

The last year was turbulent for the European economy with Ukraine war-driven shocks including surging energy prices, crises involving food supply, faster-than-expected monetary tightening, subsidies and inflation emerging as major economic issues facing the continent.

Reflecting this turbulence, the world's largest financial institutions, including the International Monetary Fund (IMF) and the World Bank, have often had to revise their projections for the year and those to come.

Before the war, the World Bank expected the global economy to expand at around 4.1%, with similar projections for the European Union. But now the global body has cut its growth forecast from 3% to 1.7% -- a sharp downturn.

The decrease is due to monetary policy tightening to tame elevated inflation, reduced investment and disruptions caused by the Ukraine war, the bank said in a report in January.

"This would mark the first time in more than 80 years that two global recessions have occurred within the same decade," it said.

The IMF also announced that global growth is expected to slow from 3.4% in 2022 to 2.9% in 2023, with the slowdown projected to be more pronounced for advanced economies.

According to a study by the German Institute for Economic Research, the war in Ukraine cost the global economy "well over $1.6 trillion" last year, with global production losses possibly amounting to another $1 trillion or so in 2023.

However, the European Commission's latest estimates showed that the EU economy is performing better than initially projected, with a growth outlook of 0.8% in the EU and 0.9% in the euro area for this year.

Additionally, inflation projections have been slightly lowered for 2023 and 2024. While the situation remains challenging, the EU is expected to avoid a technical recession, which had been feared earlier.

"Following robust expansion in the first half of 2022, growth momentum abated in the third quarter, although slightly less than expected. Despite exceptional adverse shocks, the EU economy avoided the fourth-quarter contraction projected in the Autumn Forecast. The annual growth rate for 2022 is now estimated at 3.5% in both the EU and the euro area," the EU said its latest forecast.

The European Commission's estimate of economic growth exceeding 3% and historically low unemployment rates are positive signs.

However, the bloc still faces significant challenges in 2023, with Russia cutting off natural gas supplies to Europe, and some countries may struggle with a technical recession.

Inflation in the euro area was revised slightly higher to 8.6% year-on-year in January from a previous forecast of 8.5% and well above the European Central Bank's target of 2%.

While a contraction, if it happens, is expected to be mild and short, the EU must continue to address these challenges proactively to ensure continued economic growth.

Amid the war, some member states have prioritized fiscal stimulus measures to boost economic growth, while others have focused on structural reforms to address longstanding challenges such as low productivity, high debt levels and demographic pressures.

Looking ahead to 2023, these divergent policy choices and tailwinds are likely to continue.

Some member states may need to maintain fiscal stimulus measures to sustain economic growth while others may shift towards fiscal consolidation to address rising debt levels.

External factors such as the global economic outlook, geopolitical risks, and climate change will also play a significant role in shaping the economic performance of EU member states in 2023.