Germany, which entered a recession last year, is expected to grow by 0.3 percent in 2024
Germany, which entered a recession last year, is expected to grow by 0.3 percent in 2024 AFP

The European Commission on Thursday cut both its growth and inflation forecasts for the eurozone in 2024, as it warned geopolitical tensions spelled rising uncertainty for the single-currency area's economy.

The forecasts by the EU's executive arm demonstrate the impact of the European Central Bank's interest rate-hiking campaign last year: a welcome fall in inflation, predicted to drop to 2.7 percent, but also worryingly sluggish growth, expected to reach just 0.8 percent.

Although the Frankfurt-based ECB has held rates steady so far in 2024, it is widely expected to begin cutting rates later this year in the face of slowing consumer prices and a weakening eurozone economy.

Inflation soared in the aftermath of Russia's invasion of Ukraine in 2022, sending energy prices sky-high as Europe scrambled to find alternative power sources.

Reflecting lower energy prices, the commission revised its inflation forecast sharply down from 3.2 percent -- although it still remains above the ECB's two-percent target.

"Lower energy commodity prices and weaker economic momentum set inflation on a steeper downward path than anticipated in the Autumn Forecast," it said in a statement.

The commission's 2024 growth forecast for the eurozone, at 0.8 percent, also marks a sharp downward revision from the previous forecast of 1.2 percent.

"After narrowly avoiding a technical recession in the second half of last year, prospects for the EU economy in the first quarter of 2024 remain weak," it said.

Brussels expects growth to reach 1.5 percent next year.

But commission executive vice president Valdis Dombrovskis warned "the global landscape remains highly uncertain" amid fears that conflict in the Middle East could broaden beyond Israel and Gaza.

"We are closely tracking geopolitical tensions, which could have a negative impact on growth and inflation," he said.

The commission was also optimistic that despite the expiry of energy support measures and trade disruptions in the Red Sea, those issues would not derail falling inflation in the longer term.

"The European economy has left behind it an extremely challenging year, in which a confluence of factors severely tested our resilience," the EU's economy commissioner, Paolo Gentiloni, 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," he added.

The eurozone has been weighed down by the area's largest economy, Germany.

The commission significantly downgraded its forecast for Germany, expecting growth of only 0.3 percent in 2024, down from its autumn prediction of 0.8 percent.

"Investment growth is projected to remain low relative to pre-pandemic values, weighed down by downbeat investor sentiment entering the year. Labour shortages continue to be a bottleneck to activity," it said about Germany in a report.

But the commission still expects the German economy to grow by 1.2 percent in 2025.

France, the EU's second-biggest economy, is doing better than Germany but the commission also cut its growth forecast for France to 0.9 percent from 1.2 percent.

And it slightly downgraded its prediction for the French economy in 2025, expecting growth of 1.3 percent, down from 1.4 percent in the autumn forecast.