EU lowers economic growth expectations amid Ukraine war

Rising energy and commodity prices resulting from Russia’s war in Ukraine are slowing Europe’s economic growth and increasing inflation.

    
A 5 euro note and pennies in a till High energy and commodity prices are driving up inflation and slowing growth

The European Commission on Monday lowered the eurozone growth forecast for 2022 down to 2.7% from a previous estimate of 4%.

The EU said rising energy and commodity prices have “exacerbated pre-existing headwinds” to growth.

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The Russian invasion is “weighing on Europe’s economic recovery” from the global pandemic, EU Economy Commissioner Paolo Gentiloni said.

What is causing the slowdown?

Before the outbreak of the Ukraine war, the outlook for the EU economy was for “prolonged and robust expansion,” the Commission said in a press release.

“War-induced logistics and supply chain disruptions, as well as rising input costs for a broad array of raw materials,” are weighing on production, the Commission said.

It also cited the drastic COVID-19 containment measures in China as a factor disturbing global supply chains.

The EU predicts that energy price-driven inflation in the eurozone will exceed 6% in 2022, peaking at 6.9% in the second quarter. The EU expects inflation to subside in the eurozone in 2023 to 2.7%.

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Some silver linings for Europe’s economy?

The Commission said that high growth in 2021 as coronavirus restrictions were lifted should dampen the worst effects of this year’s lower prognosis.

“Last year’s strong economic rebound will have a lingering positive effect on growth rates this year,” said Gentiloni

“A strong labor market, post-pandemic reopening…should provide further support to our economies and help to drive public debt and deficits lower,” he added.

Employment in the EU is projected to grow by 1.2% this year, the Commission said.

European Commissioner for Trade, Valdis Dombrovskis, said the EU’s economic fundamentals are “solid.”

“Before this war started, the EU economy had embarked on a path of strong recovery and growth. More jobs are being created in the EU economy, attracting more people into the labor market and keeping unemployment low,” he said.

In providing its forecast, the Commission has admitted it is currently difficult to accurately asses economic growth as economic activity and inflation are “heavily dependent on the evolution of the war, and especially on its impact on energy markets.”

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