EU Lowers Growth Outlook, Raises Inflation Forecasts Due to Ukraine War
May 16 2022 - 05:38AM
Dow Jones News
By Maria Martinez
Russia's invasion of Ukraine has dashed hopes for a prolonged
and robust expansion following the Covid-19 pandemic, the European
Commission said Monday as it lowered growth expectations for the
eurozone economy for 2022 and 2023.
"Russia's invasion of Ukraine is causing untold suffering and
destruction, but is also weighing on Europe's economic recovery,"
said Paolo Gentiloni, Commissioner for the Economy.
The war is exacerbating pre-existing headwinds to growth that
were previously expected to subside, as it exerts further upward
pressure on commodity prices, causing renewed supply disruptions
and greater uncertainty, the European Commission said in its spring
forecasts.
"While growth will continue this year and next, it will be much
more subdued than previously expected," European Commission
Executive Vice President Valdis Dombrovskis said.
Gross domestic product in the 19-member eurozone is forecast to
grow by 2.7% in 2022, the Commission said in its quarterly report,
downgrading its February forecast of a 4.0% expansion. Eurozone
economic growth is projected at 2.3% for 2023, down from 2.7%
previously.
The post-pandemic re-opening of contact-intensive services, a
strong and still improving labor market, lower accumulation of
savings and fiscal measures to offset rising energy prices are set
to support private consumption, the Commission said.
"The overwhelming negative factor is the surge in energy prices,
driving inflation to record highs and putting a strain on European
businesses and households," Mr. Dombrovskis said.
Headline inflation in the eurozone surged to 7.5% in April, the
highest rate in the history of the monetary union. Inflation in the
eurozone is projected at 6.1% in 2022, up from 3.5% in February's
forecasts. Inflation in 2023 is projected at 2.7% in 2023, up from
1.7% previously.
"The war has led to a surge in energy prices and further
disrupted supply chains, so that inflation is now set to remain
higher for longer," Mr. Gentiloni said.
Inflation is expected to peak at 6.9% in the second quarter of
this year and decline gradually thereafter, the Commission
said.
"The labor market is entering the new crisis on a strong
footing," the report said. Unemployment rates at the end of 2021
fell below previous record lows and labor-market conditions are
expected to improve further. The eurozone unemployment rate is
forecast to decline to 7.3% this year and to 7.0% in 2023.
Despite the cost of measures to mitigate the impact of high
energy prices and to support people fleeing Ukraine, the aggregate
government deficit in the eurozone is set to decline further in
2022 and 2023 as temporary Covid-19 support measures continue to be
withdrawn. From 5.1% of GDP in 2021, the deficit in the eurozone is
forecast to fall to 3.7% of GDP in 2022 and 2.5% in 2023.
Risks to the forecast for economic activity and inflation are
heavily dependent on the evolution of the war in Ukraine and, in
particular, its impact on energy markets, the Commission said.
"Other scenarios are possible under which growth may be lower
and inflation higher than we are projecting today," Mr. Gentiloni
said.
In the scenario of a sudden cut in gas supply from Russia, GDP
growth rates would be around 2.5 and 1 percentage points below the
forecast baseline in 2022 and 2023, respectively, while inflation
would increase by 3 percentage points in 2022 and by more than 1
percentage point in 2023, above the baseline projection.
Write to Maria Martinez at maria.martinez@wsj.com
(END) Dow Jones Newswires
May 16, 2022 05:23 ET (09:23 GMT)
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