The European Commission on Thursday lowered its growth forecasts for the euro zone for 2022 and 2023. These drop to 2.6% and 1.4% respectively, against 2.7% and 2.3% expected so far, due to the increasing impact of the war in Ukraine.
Inflation has been propelled to historic highs due to the Russian offensive and the Western sanctions it has brought about. Brussels raised its forecast for consumer price inflation to 7.6% in 2022 and 4% in 2023, from 6.1% and 2.7% previously expected, in the 19 countries sharing the single European currency.
Overall, the economy in the euro zone “should continue to expand, but at a much slower pace” than that forecast in the last forecasts published in May, underlines the European executive. However, the Commission warns that the situation could get even worse if gas supplies are cut off by Moscow, as Europe is still very dependent on Russian hydrocarbons.
“As the evolution of the war and the reliability of gas supplies are unknown, this forecast is subject to high uncertainty and downside risks”, underlined the European Commissioner for the Economy, Paolo Gentiloni, during a press conference. ‘Russia’s invasion of Ukraine has put additional upward pressure on energy and basic food prices. These (…) erode the purchasing power of households’, noted the Commission in its forecasts.
Monetary tightening
Among the other factors having a negative impact on growth, the Commission notes the “faster than expected” tightening of monetary policy by the European Central Bank (ECB), necessary to stem inflation. Added to this are ‘the continued deceleration of growth in the United States’ and the impact of Beijing’s policy against Covid-19 which has led to confinements and factory closures in China.
The war in Ukraine has ended the strong rebound of the European economy that began in spring 2021, after the historic pandemic-induced recession in 2020. ‘The momentum of the reopening of our economies should support annual growth in 2022, but for 2023, we have significantly revised our forecasts downwards,” explained Paolo Gentiloni.
On the inflation front, the Commission estimates that the peak should be reached in the third quarter, with an annual rate estimated at 8.4%. It should then gradually reduce until it falls below the 3% mark at the end of 2023. The rise in consumer prices in June broke a new record in the euro zone, at 8.6% over one year.
The growth and inflation forecasts, announced Thursday, “depend heavily on the evolution of the war and in particular on its implications for gas supplies in Europe”, warns Brussels. ‘Further increases in gas prices could further increase inflation and stifle growth’, underlines the European executive.
In addition, the wage increases decided in Europe to compensate for the rise in the cost of living could in turn reinforce the surge in prices and trigger a vicious inflationary circle. This could lead to an even higher rise in interest rates, which could not only slow growth, but also pose “increased risks to financial stability”, worries the Commission.
As Europe faces a new wave of Covid-19 contamination this summer, the Commission also notes “the possibility that the resurgence of a pandemic in the EU will bring further disruption to the economy”.
/ATS