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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