European Commission slashes EU 2022 growth forecasts on war impact
LONDON (ICIS)–The European Commission on Monday cut its 2022 GDP growth forecast for the EU from 4% to 2.7%, with the Russia-Ukraine war exacerbating existing economic headwinds that had been expected to subside.
A strong economic rebound from economies shifting back to a normal footing in the wake of easing COVID-19 restrictions has been dampened by surging inflation and commodity pricing, with the onset of the Ukraine conflict likely to prolong those drags on growth, the Commission said.
“By exerting further upward pressures on commodity prices, causing renewed supply disruptions and increasing uncertainty, the war is exacerbating pre-existing headwinds to growth, which were previously expected to subside,” the European Commission said in its spring economic outlook.
Eurozone GDP growth is now expected to be 2.7% this year compared to earlier projections of 2.8%, with inflation for the bloc expected to average 6.1% for 2022 as a whole, based on Commission expectations that levels will peak at 6.9% in the second quarter.
German economic growth is expected to stand among the weakest in the bloc this year at 1.6%, with Portugal and the Republic of Ireland expected to be the strongest performers at 5.8% and 5.4% respectively.
Commodity pricing, which has surged since the fourth quarter of 2021 and only jumped further since the onset of the crisis, is the key driver of economic pressure in Europe, with supply chain disruption also pushing prices of goods such as food up.
Many chemicals firms have been passing through double-digit percentage price increases each quarter on the back of higher raw materials costs, with the impact of renewed COVID-19 lockdown measures in China also weighing on demand and industrial production, the Commission said.
Energy pricing has stabilised in recent weeks but the onset of the summer travel season is expected to push fuel costs higher, while any sudden abatement of Russian natural gas flows to Europe could see energy pricing skyrocket once more. Many producers have warned of production cuts and shutdowns in the event of substantial gas supply disruptions.
“The overwhelming negative factor is the surge in energy prices, driving inflation to record highs and putting a strain on European businesses and households,” said European Commission executive vice-president Valdis Dombrovskis.
“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,” he added.
Higher energy pricing has also deepened European trade deficits, according to data released on Monday, with the EU and eurozone both suffering under the largest deficits in several decades, at €27.7bn and €16.4bn respectively in March. The eurozone had boasted a trade surplus of €22.5bn during the same month a year earlier. The current forecasts do not incorporate the longterm impact of an economic decoupling between Europe and Russia, which has been the perennial key source of energy to the continent.
“Beyond these immediate risks, Russia’s invasion of Ukraine is leading to an economic decoupling of the EU from Russia, with consequences that are difficult to fully apprehend at this stage,” the Commission added.
Thumbnail picture: The Ukrainian flag projected onto the European Council HQ in Brussels, Belgium (Source: The European Commission)