EC projects 3.7% eurozone GDP deficit for 2023

The EC also forecasts eurozone real GDP to increase 0.3 per cent in 2023 and its forecasts for individual economies are almost all more pessimistic than the DBPs. The 1.6 per cent growth implied by the DBPs incorporates Germany’s use of a 2.5 per cent real GDP growth forecast for 2023. More recent German government forecasts see output contracting by 0.4 per cent next year, closer to the EC’s -0.6 per cent forecast, said finance company Fitch Ratings in a media release.

EC and the national government policy assumptions also differ. Under its ‘no-policy change’ approach, the EC considers measures that it thinks have been credibly announced in sufficient detail and estimates net budgetary costs of energy support in 2023 at 0.9 per cent of GDP at the European Union (EU) level. This would be less than in 2022, but the EC warns it may be an underestimate as many member states have not announced energy packages covering 2023 in full. It estimates that extending existing support packages throughout the year would increase the total net cost to nearly 2 per cent of GDP.

For Italy, the updated draft budget of the new government of Giorgia Meloni has been used, which incorporates additional energy support, resulting in larger deficits than in the DBP.

Notwithstanding forecasting differences, the national DBPs underscore how the energy crisis will hold back post-pandemic public finance recoveries, as governments try to prevent an unfettered pass-through from higher wholesale energy prices to household bills. Renewed support measures are a widespread feature of the 2023 DBPs, and 13 eurozone countries project larger deficits compared to their Stability Programmes submitted in April. Eight now forecast wider fiscal deficits next year than in 2022.

Germany’s unchanged deficit projection in its DBP versus its Stability Programme does not factor in the energy subsidy ‘shield’ announced in late September, worth up to €200 billion. Fitch incorporates a fiscal impact from this measure in its 3.5 per cent-of-GDP 2023 deficit forecast, which assumes less than half the maximum funds are spent. The German government recently increased its cash flow budget deficit target to €45.6 billion, consistent with its domestic debt-brake rule, but not including the various off-budget funds.

Revenue outperformance so far has contained fiscal deterioration. Central government revenues in the four largest eurozone economies posted double-digit year-on-year (YoY) growth in 8M22. Additionally, the DBPs’ forecast changes to structural balances, which account for the output gap, point to a contractionary fiscal stance in most eurozone sovereigns.

Several high-debt sovereigns, including Italy, Spain, Portugal, and Greece, are still targeting deficit reduction in 2023. France’s 2023 deficit is unchanged YoY in its DBP. Belgium’s shows the headline deficit widening, due to one-off measures and the automatic indexation of wages, pensions, and social benefits.

The DBP projections are consistent with small declines in public debt/GDP in a majority of eurozone sovereigns, but only Portugal, Cyprus, Ireland, and Greece reduce their debt ratios below pre-pandemic levels next year.

Eventual response costs depend on the highly uncertain path of wholesale gas prices, as in part does the income shock and consequent impact on growth and revenues. Meanwhile, the European Central Bank’s (ECB) tightening has increased sovereign borrowing costs and Fitch has increased its forecast for ECB policy rates in 2023.

ALCHEMPro News Desk (NB)