Eurozone economic growth this year will be slower than earlier expected, as rising energy prices and supply chain problems jack up inflation and delay a more sustained recovery from the pandemic, the European Union executive arm said Thursday.
In its regular economic forecasts, the European Commission said gross domestic product (GDP) in the 19 countries sharing the euro would grow 4% this year and 2.7% in 2023.
The forecast is a cut compared to last November, when the commission forecast 4.3% growth in 2022 and 2.4% in 2023 and is close to the latest view of the International Monetary Fund (IMF), which expects growth of 3.9% this year and 2.5% in 2023.
"Multiple headwinds have chilled Europe’s economy this winter: The swift spread of omicron, a further rise in inflation driven by soaring energy prices and persistent supply-chain disruptions," European Economic Commissioner Paolo Gentiloni said.
"With these headwinds expected to fade progressively, we project growth to pick up speed again already this spring," he added.
The commission expects inflation this year will be 3.5%, well above the European Central Bank’s (ECB) target of 2%, and much higher than its own forecast from November of 2.2%. This is also a more pessimistic forecast than that of the ECB from December, when the bank projected inflation at 3.2% this year.
Worried by the longer than earlier expected surge in consumer prices, the ECB has taken a hawkish turn and started preparing markets for the end of its unconventional stimulus with some hawkish board members calling for a rate hike already this year.
But the commission, like the IMF, forecast inflation would slow again next year to 1.7%, below the ECB’s target, so a potential rate rise would come just as price growth slows again. The ECB’s own inflation in December was 1.8% for 2023.
"Price pressures are likely to remain strong until the summer, after which inflation is projected to decline as growth in energy prices moderates and supply bottlenecks ease. However, uncertainty and risks remain high," Gentiloni said.
The commission said risks to the growth outlook were even as the COVID-19 infection wave could have a longer-lasting impact and bring fresh disruptions to supply chains, but also household consumption could grow more strongly and investment, thanks to the EU recovery fund, could generate stronger activity.
Inflation could turn out higher if more cost pressures are passed on from producers to consumers, and if that happens, it boosts the likelihood of wage growth to compensate.
"Risks to the growth and inflation outlook are aggravated by geopolitical tensions in Eastern Europe," the commission said, referring to the more than 100,000 Russian troops that are deployed on the border with Ukraine, raising Western fears of potential military action.
The crisis has brought major uncertainty over the supply of energy from Russia, which accounts for roughly 40% of the gas that heats homes and powers factories in the 27-member EU.
"Apparently Russia has no interest in increasing supplies right now, despite peak prices," European Commission President Ursula von der Leyen said in a video address to a business conference in Brussels.
"It is our dependence on the (gas) imports that makes us so vulnerable to price hikes," she said.
The ECB is under a lot of pressure over inflation, with increasing calls that monetary stimulus and a zero-interest-rate policy be scaled back.
The pace of price rises in the bloc unexpectedly rose to 5.1% in January, the highest since records for the currency club began in 1997.
The debate deepened last week when the EU announced a record-low unemployment rate for the eurozone, feeding a belief that consumer demand could surge, further pressuring prices.
ECB chief Christine Lagarde told a European Parliament committee this week that "there is no need to rush to any premature conclusion at this point in time."
The eurozone economy does "not show the same signs of overheating that can be observed in other major economies," she said, referring to the United States and Britain where central bankers have moved to sharply tighten monetary policy.
A tightening of monetary policy and higher interest rates would put significant pressure on European countries with higher debt loads, such as Italy, Greece, Spain and France, by increasing the cost of financing their spending.
