More inflation and less growth: the gloomy outlook for the European economy

Europe pays for the effects of the Russian attack on Ukraine. The European Commission released on Thursday the economic forecasts for the second half of this year and for 2023 which confirm that economic growth is languishing while inflation continues to rise.

The Eurozone will grow by 2.6% this year and by 1.4% in 2023. Inflation continues to rise and hits historical records of nearly four decades. This year it could be 8.4%, according to forecasts from the executive arm of the European Commission. In 2023 it should go down up to 4%.

The European Commissioner for Economy, the Italian Paolo Gentiloni, acknowledged that everything could get worse: “The evolution of the war and the reliability of gas supplies are unknown, so this forecast is subject to great uncertainty and risks”.

The European Central Bank warned as early as June that if gas supplies from Russia stopped completely all these forecasts would be outdated and the Eurozone will go headlong into recession.

dark predictions

Even if the geopolitical situation does not worsen, according to the data of the report the Eurozone “should continue to expand but at a much slower pace”.

Because “the Russian invasion of Ukraine carries on further upward pressure on energy prices and basic food products, undermining the purchasing power of families “.

The problem is not just the war. The European Commission also acknowledges that the “faster than expected” tightening of interest rates by the European Central Bank (this month it could raise policy rates by 0.25 or 0.50 points) slows growth, although the issuer of the euro considers it necessary to curb inflation.

Nor does it help the fact that the US economy is growing less or the Chinese way of handling the latest waves of Covid-19, with massive plant and port closures.

The European Commission estimates that inflation will continue to rise, but that it is expected to peak in this third quarterreaching 7.6% in the Eurozone and 8.4% in the European Union as a whole.

Brussels expects a sharp decline of around 3% in 2023. In June it reached 8.6% in the Eurozone. These figures are based on current energy prices. Brussels acknowledges that “further increases in the price of gas could increase inflation and slow growth”.

The forecast report also indicates that wage increases to offset inflation are a risk factor because they could have the potential to trigger a vicious cycle, although the data does not show widespread wage increases beyond certain sectors.

Germany stops

Germany stops the train. The locomotive is gripped by its enormous dependence on gas to run its industries. The German economy will grow this year by 1.4%, below that of France (2.4%), Italy (2.9%) and Spain (4.0%, the fastest growing among the large Europeans).

As for inflation, the Spaniards this year would be 8.1%, the Germans 7.9%, the Italians 7.4% and the French 5.9%.

Average European inflation is slightly higher than that of its major economies because some countries have accelerated it.

The Baltic republics have all three inflation above 15%. Its trade relations with Russia were much broader than those with Western Europe.

Brussels, special

CB