Russia’s Aggression Worsens EU Economic Outlook: European Commission

According to European Commission’s Summer 2022 Economic Forecast, Russia’s war of aggression against Ukraine continues to negatively affect the EU economy, setting it on a path of lower growth and higher inflation compared to the Spring Forecast.

The said report projects that the EU economy will grow by 2.7% in 2022 and 1.5% in 2023. Growth in the euro area is expected at 2.6% in 2022, moderating to 1.4% in 2023.

Whilst annual average inflation is projected to peak at historical highs in 2022, at 7.6% in the euro area and 8.3% in the EU, before easing in 2023 to 4.0% and 4.6%, respectively.

Many of the negative risks surrounding the Spring 2022 Forecast have materialised, the report said.

“Russia’s invasion of Ukraine has put additional upward pressures on energy and food commodity prices. These are feeding global inflationary pressures, eroding the purchasing power of households and triggering a faster monetary policy response than previously assumed.”

“Ongoing deceleration of growth in the US is adding to the negative economic impact of China’s strict zero-COVID policy.”  

The forecast report also added that, “the EU economy remains particularly vulnerable to developments in energy markets due to its high reliance on Russian fossil fuels, and weakening global growth detracts from external demand. Momentum gathered with the rebound of last year and a somewhat stronger than previously estimated first quarter is set to prop up the annual growth rate for 2022.”

However, the report stressed that the economic activity in the remainder of the year is expected to be subdued, notwithstanding a promising summer tourism season.

The forecast, however, remains hopeful it expects , quarterly economic growth is expected to gather momentum next year on the back of a resilient labour market, moderating inflation, support from the Recovery and Resilience Facility and the still large amount of excess savings.

“The EU economy is set to continue expanding, but at a significantly slower pace than expected in the Spring 2022 Forecast,” it said.

“Risks to the forecast for economic activity and inflation are heavily dependent on the evolution of the war and in particular its implications for gas supply to Europe.”

“New increases of gas prices could further drive up inflation and stifle growth. Second round effects could in turn amplify inflationary forces and lead to a sharper tightening of financial conditions that would not only weigh on growth, but also come with increased risks for financial stability. The possibility that the resurging pandemic in the EU brings renewed disruptions to the economy cannot be excluded,” the forecast forewarned.

“Recent downward tendencies of oil and other commodity prices could intensify, bringing about a faster decline in inflation than currently expected. Moreover, thanks to a strong labour market, private consumption could prove more resilient to increasing prices if households were to use more of their accumulated savings,” it concluded.

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