The European Commission has raised its inflation forecasts for the eurozone considerably and has slashed its 2023 growth forecast for the bloc as Russia’s war against Ukraine takes its toll on the economy.
Following the revision, the European Commission expects eurozone inflation at 7.6% in 2022, up from its previous forecast of 6.1% published in May. Annual average inflation is projected to peak at historical highs in 2022, according to the Commission’s forecasts. For 2023, eurozone inflation is forecast at 4.0%, up from 2.7% in the Spring forecasts.
“Moscow’s actions are disrupting energy and grain supplies, pushing up prices and weakening confidence,” European Commissioner for Economy Paolo Gentiloni said.
Russia’s invasion of Ukraine has put additional upward pressures on energy and food prices, which are feeding into global inflationary pressures, eroding the purchasing power of households and triggering a faster monetary policy response than previously assumed, the European Commission said.
“In view of high inflation and tightening financing conditions, it will be important to find the right balance between moving towards a more prudent fiscal stance and protecting the most vulnerable,” EU Executive Vice-President Valdis Dombrovskis said.
The eurozone economy remains particularly vulnerable to developments in energy markets due to its high reliance on Russian fossil fuels, the European Commission said.
Mr. Dombrovskis is urging the EU to reduce its dependence on Russian fossil fuels. “Russia’s war against Ukraine continues to cast a long shadow over Europe and our economy,” he said.
Economic activity in the remainder of the year is expected to be subdued, notwithstanding a promising summer tourism season, the European Commission forecasts. Quarterly economic growth is expected to gather momentum in 2023 on the back of a resilient labor market, moderating inflation, support from the Recovery and Resilience Facility and a large amount of excess savings.
Gross domestic product in the 19-member eurozone is projected to grow 2.6% in 2022, the EU said in its quarterly report. It previously forecast 2.7% growth for the year in May. The economy is expected to expand 1.4% in 2023, weaker than the 2.3% previously expected.
“With the course of the war and the reliability of gas supplies unknown, this forecast is subject to high uncertainty and downside risks,” Mr. Gentiloni warned.
Fresh increases in gas prices could further drive up inflation and stifle growth, the European Commission said.
Write to Maria Martinez at [email protected]