Brussels has lifted its forecasts for inflation this year and in 2023 while cutting back its growth outlook, as the energy crisis fuelled by Russia’s war in Ukraine continues to hammer Europe’s economy.
Inflation is now predicted to hit 7.6 per cent this year in the euro area, according to the European Commission — compared with the previous forecast of 6.1 per cent. Inflation will fall to 4 per cent in 2023 — still far above the European Central Bank’s 2 per cent target and significantly higher than the prediction of 2.7 per cent in its spring forecast.
Growth in gross domestic product, meanwhile, will be weaker than previously forecast in the euro area, at 2.6 per cent this year and 1.4 per cent in 2023. Growth across the wider EU will be 2.7 per cent this year and 1.5 per cent in 2023.
The revised predictions come as the ECB prepares for its first rate rise in a decade this month in a bid to prevent inflation from getting embedded above its 2 per cent target. The central bank is getting ready to move even as economists warn the EU could be heading into a recession given the threat of widespread interruptions in gas supplies from Russia.
“Russia’s war against Ukraine continues to cast a long shadow over Europe and our economy,” said Valdis Dombrovskis, executive vice-president at the commission. “We are facing challenges on multiple fronts, from rising energy and food prices to a highly uncertain global outlook.”
The commission warned in its analysis that the EU was particularly vulnerable to developments in energy markets given its reliance on Russian fossil fuels. That threat was underscored this week as Russia shut down a major pipeline to Germany, underpinning concerns about Moscow’s willingness to use fuel supplies as an economic weapon against the EU.
The commission is urging member states to do more to prepare for supply interruptions, and according to draft plans wants capitals to turn down heating levels in public buildings and compensate industries for curbing gas use.
Paolo Gentiloni, the economics commissioner, said on Thursday that GDP growth in 2022 would be propped up by the momentum of countries exiting pandemic-related lockdowns last year, but growth next year would be sharply weaker than anticipated.
Inflation will be highest this year in the Baltic states, with Estonia and Lithuania both forecast to have 17 per cent year-on-year price growth, while Poland, Hungary, Romania and the Czech Republic are among the other countries that will weather double-digit price increases in 2022.
Further gas price increases could strengthen the “stagflationary forces currently at play”, the commission warned, predicting a marked slowdown in growth in the second half of the year.
Growth is set to be suppressed by a slowdown in the US, where the Federal Reserve is aggressively lifting interest rates, as well as larger-than-expected damage from coronavirus lockdowns in China.
The commission said there was a risk of “adverse outcomes” in terms of economic growth, given the EU’s geographical proximity to the war and the threat that Russia makes further cuts to energy supplies.
Source: Economy - ft.com
