EU Lowers Eurozone Growth Forecast as Ukraine War Continues

The European Commission has cut its forecast for European growth this year to 2.7 percent, and hiked its inflation forecast, as the Ukraine war continues its toll on the economy.

In its latest Spring forecasts, the EC predicts real GDP growth in both the EU and the euro area of 2.7% in 2022, down from the 4% forecast three months ago. Growth is expected to slow to 2.3% in 2023, down from a previous forecast of 2.8% in the EU (and 2.7% in the euro area).

With energy prices soaring this year, inflation is expected to average 6.1% in 2022, and peak at 6.9% in the current quarter (it hit 7.5% in April, the highest rate in the history of the monetary union).

The Commission says the outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion, but with Russia’s invasion of Ukraine, new challenges have surfaced, coming just when the Union is recovering from the economic impacts of the pandemic.

By exerting further upward pressures on commodity prices, causing renewed supply disruptions, and increasing uncertainty, the war is heightening pre-existing headwinds to growth, which were previously expected to subside.

“There is no doubt that the EU economy is going through a challenging period due to Russia’s war against Ukraine, and we have downgraded our forecast accordingly,” EU executive vice president Valdis Dombrovskis 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,” he added.

The report highlights that the Ukraine war has raised pre-existing headwinds facing the economy, which has consequently led to rising energy commodity prices, supply chain disruption, and inflation of food and other basic goods and services.

“The main hit to the global and EU economies comes through energy commodity prices. Although they had already increased substantially before the war, from the low levels recorded during the pandemic, uncertainty about supply chains has pressured prices upwards, while increasing their volatility,” the report stated.

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