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(Bloomberg) — The euro-zone economy will fare better this year than previously feared as a mild winter and high levels of gas storage help to ease the energy crisis, and the labor market holds up, according to the European Commission.

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European Union officers in Brussels raised their forecast for development this yr, predicting a 0.9% growth within the foreign money bloc, and mentioned it could narrowly keep away from a recession. In addition they minimize their projection for client worth development, although it stays excessive at 5.6%.

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“Nearly one yr after Russia launched its conflict of aggression towards Ukraine, the EU economic system is on a greater footing than anticipated in autumn,” the fee mentioned Monday in its up to date financial report. “Inflation seems to have peaked and favorable developments in power markets foreshadow additional forceful declines.”

The elevated optimism contrasts with forecasts given in November, when officers predicted gross home product would develop simply 0.3% this yr within the euro zone and inflation can be at 6.1%.

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The brand new projections will likely be carefully watched by Europe’s governments as they attempt to wean households and companies off huge support to sort out the power disaster and shift to extra focused help. They may also present perception to central bankers, who’ve launched into a collection of fee hikes in an effort to convey hovering inflation again underneath management.

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The newest fee forecasts present that every one EU member states will obtain development this yr, except Sweden, which is anticipated to contract by 0.8%.

Germany, the area’s largest economic system, and Austria are the one two euro-area international locations seen having two consecutive quarters of contraction within the six months by March 31. Estonia’s output decreased within the final three quarters of 2022 however is seen rising within the present interval.

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Italy’s economic system is predicted to stagnate within the first three months of 2023 after a slight contraction within the fourth quarter, in response to the fee’s forecasts. 

Outdoors the euro zone, the Czech Republic and Hungary have already ended two quarters of contraction, whereas Denmark and Sweden are presently in recession.

The fee cautioned that whereas the outlook has improved, headwinds stay robust as Russia pursues its conflict in Ukraine.

“Shoppers and companies proceed to face excessive power prices, and core inflation — headline inflation excluding power and unprocessed meals — was nonetheless rising in January, additional eroding households’ buying energy,” it mentioned. “As inflationary pressures persist, financial tightening is about to proceed, weighing on enterprise exercise and exerting a drag on funding.”

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Information from Eurostat on the finish of January already advised the euro space was heading in the right direction to keep away from a recession after unexpectedly rising by 0.1% on the finish of 2022. Inflation within the 20-member foreign money bloc slowed greater than anticipated in January to eight.5%, in response to Eurostat, although a gauge of underlying inflation that excludes risky objects held at an all-time excessive of 5.2%.

The European Central Financial institution lifted the deposit fee by a half-point to 2.5% on Feb. 2, the very best since 2008, and mentioned it meant to make an equivalent step subsequent month. President Christine Lagarde known as dangers to the expansion and inflation outlook extra balanced, touting the continent’s surprising resilience.

—With help from Andrew Langley.