EU growth forecast cut as war in Ukraine fuels inflation
The growth prospects for the EU have been revised sharply downwards after Russia’s invasion of Ukraine put paid to hopes of a strong and sustained recovery from Covid-19 over the next two years.
Rocketing energy prices as a result of the conflict have pushed up inflation and increased economic headwinds during a period when they were expected to subside, the European Commission said in its latest forecasts.
The commission now expects 2022 growth of 2.7% in the 19-nation euro area and the broader 27-country EU – down from a forecast of 4% three months ago.
But it said a complete cut in supplies of Russian gas would shave a further 2.5 points off growth – bringing the economy to a virtual standstill this year.
With many European countries heavily dependent on Russian energy exports, growth is expected to slow further next year – to 2.3% in the EU and the euro area.
Inflation, already at its highest in the euro area since the creation of the single currency more than two decades ago, is expected to average 6.1% this year, up from 3.5% in the last set of commission predictions in February. EU-wide inflation is expected to average 6.8%. Inflation would average close to 10% in the event of a Russian gas ban, the commission said.
“The outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion. But Russia’s invasion of Ukraine has posed new challenges, just as the Uunion had recovered from the economic impacts of the pandemic,” it said in a statement.
The fastest growing countries in the EU this year are expected to be Portugal, at 5.8%, and Ireland (5.4%), with Estonia (1%), Germany and Finland (both 1.6%) forecast to be the weakest.
Valdis Dombrovskis, an EU trade commissioner, said: “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.
“The overwhelming negative factor is the surge in energy prices, driving inflation to record highs and putting a strain on European businesses and households. While growth will continue this year and next, it will be much more subdued than previously expected. Uncertainty and risks to the outlook will remain high as long as Russia’s aggression continues.”
News of the gloomier outlook for the EU came in after signs of a rapid slowing in the world’s second biggest economy, China.
Analysts had pencilled in an annual decline in retail sales of 6% in April as a result of lockdowns and falling consumer confidence but official figures showed the fall was almost twice as big at just over 11%.
The closure of factories meant industrial production fell by 2.9% year on year in April – the biggest fall since the early months of the pandemic in 2020. Meanwhile, the unemployment rate – a closely watched indicator by the Chinese authorities – rose from 5.8% to 6.1%.
Iris Pang, an analyst at ING, said she expected China’s gross domestic product – a measure of its growth rate – to be 1% lower in the second quarter of 2022 than a year earlier.
“The main reason is the long lockdown in Shanghai,” Pang said. “This hurt retail sales the most, and also those factories that do not have ‘closed-loop operation’; if they don’t have dormitories for workers, they struggle to operate.”