The eurozone economy will grow slower than previously expected this year, the European Commission forecast on Monday, as consumer demand suffers from high inflation and the biggest economy, Germany, slips into recession this year.

In its interim forecasts for gross domestic product and inflation of the eurozone's five biggest economies, the Commission said the single currency area's gross domestic product (GDP) would expand 0.8% in 2023 and 1.3% in 2024, against forecasts of 1.1% and 1.6% respectively made in May.

"While we avoided a recession last winter, the multiple headwinds facing the EU economy this year have led to somewhat weaker growth momentum than we projected in the spring," the economy commissioner, Paolo Gentiloni, said during a press conference.

The Commission, in its report said there would be "slowing economic activity in the summer and months ahead, with continued weakness in industry and fading momentum in services, despite a strong tourism season in many parts of Europe."

Europe will also be unable to "count on strong support" from exports amid weak global growth and demand.

"Weakness in domestic demand, in particular consumption, shows that high and still increasing consumer prices for most goods and services are taking a heavier toll than expected in the spring forecast," the Commission said.

"This is despite declining energy prices and an exceptionally strong labor market, which has seen record low unemployment rates, continued expansion of employment, and rising wages," it said.

The growth forecast for the 27-nation EU as a whole was also cut for 2023 to 0.8% from an earlier prediction of around 1%.

The single currency area made up of 20 countries will grow by 1.3% in 2024, the Commission said, down from a previous forecast of 1.6%.

EU growth will be slightly better at 1.4% next year.

'Sick man' Germany?

Germany, Europe's biggest economy, will shrink 0.4% this year, the Commission forecast, revising down a 0.2% growth prediction from May. Next year, German growth will also be slower at 1.1% instead of the earlier expected 1.4%.

Germany faces a recession in its vast industrial sector and a lackluster performance in exports, both of which have significant impacts on the whole of the economy.

In its report, the Commission pointed to manufacturing weakness and said Germany was "hit particularly hard" by energy price shocks linked to the war in Ukraine.

The International Monetary Fund (IMF) had already predicted Germany would be the only major advanced economy to shrink in 2023.

Gentiloni, however, sounded an optimistic note for improvement in Germany's economy.

"The situation of domestic consumption, domestic demand, household purchasing power, could be improved in the coming months and this could bring the German economy back to a growth trajectory," he told reporters in Brussels.

But, he added, "the structural challenges on energy and other aspects are there. You don't solve this in a couple of weeks."

The gloomy German data prompted an Economist cover story in August that asked, "Is Germany once again the sick man of Europe?"

Asked whether he would agree with the "sick man" description, Gentiloni rejected using such titles in the EU's analysis.

"I don't think we can base our analysis on titles on the cover of newspapers," he said, adding, "Germany is a strong economy with the tools and possibility to recover."

Italy and the Netherlands will also grow more slowly this year, the Commission said, forecasting a GDP expansion of 0.9% and 0.5%, respectively, down from 1.2% and 1.8%.

But France and Spain will grow faster than previously expected in 2023, it noted, projecting 1% and 2.2% growth, respectively, instead of the previously seen 0.7% and 1.9%.

Stubborn inflation

The Commission forecast eurozone consumer inflation of 5.6% in 2023 and 2.9% in 2024, both well above the European Central Bank's (ECB) target of 2%.

Inflation this year is to be lower than the 5.8% forecast in May but higher than previously forecast in 2024, as the May forecast was for 2.8%.

The ECB has been rapidly raising rates since the middle of 2022 to stem record price growth, making credit for the economy more expensive – a factor that the Commission said has impacted the forecasts.

The ECB policy-makers are due to meet on Thursday to decide whether to raise borrowing costs again or pause the tightening campaign.

"The sharp slowdown in the provision of bank credit to the economy shows that monetary policy tightening is working its way through the economy," the Commission said, thereby reducing individuals' and businesses' ability to invest.