The European Union has cut its forecast for economic growth in the 27-nation bloc amid the prospect of a long Russian war in Ukraine and disruptions to energy supplies.
The EU’s gross domestic product (GDP) will grow by 2.7% this year and 2.3% in 2023, the bloc’s executive said on Monday – its first economic forecast since Ukraine invaded Ukraine. Russia on February 24.
The European Commission’s previous outlook called for growth of 4% this year and 2.8% in 2023. The EU economy grew by 5.4% last year after a deep recession caused by the pandemic of COVID-19. GDP fell by 5.9% in 2020.
“Russia’s invasion of Ukraine has posed new challenges, just as the Union has recovered from the economic impacts of the pandemic,” the commission said when releasing the forecast. “War exacerbates pre-existing headwinds to growth.”
The war clouded what was usually a bright economic picture for the EU. At the start of this year, European policymakers were counting on solid, albeit weaker, growth while grappling with runaway inflation triggered by a global energy crisis.
Now energy has become a key issue for the EU as it seeks sanctions that strip Russia of tens of billions of dollars in trade revenue without plunging member countries into recession. Soaring energy prices are driving record inflation, making everything from food to transportation and housing more expensive.
Russia is the EU’s biggest supplier of oil, natural gas and coal, accounting for around a quarter of the bloc’s total energy. Last year, EU energy imports from Russia totaled 99 billion euros ($103 billion), or 62% of the bloc’s purchases of Russian goods.
An EU ban on coal from Russia is due to start in August, and a voluntary effort is underway to cut demand for Russian natural gas by two-thirds this year. A proposed oil embargo has hit roadblocks amid reserves in some landlocked countries that rely heavily on Russian oil, such as Hungary.
All of this has the EU scrambling to secure alternative energy supplies in the coming months, including from fossil fuel exporting countries such as the US and from domestic renewable sources meant to help the bloc. achieve its longer-term climate goals.
“Russia’s invasion of Ukraine is leading to an economic decoupling of the EU from Russia, with consequences that are difficult to fully grasp at this stage,” the Commission said. European.
The latest forecast also paints a bleaker picture for inflation due to higher energy prices. EU-wide inflation is now expected to be 6.8% this year and 3.2% in 2023, well above previous projections of 3.9% and 1.9%, respectively.
EU Economics Commissioner Paolo Gentiloni has warned that even the new economic outlook may be too optimistic given the war.
“Our forecast is subject to very high uncertainty and risk,” Gentiloni said. “Other scenarios are possible in which growth could be weaker and inflation higher than we expect.”
In the months before the invasion, a global energy crisis had pushed inflation in Europe to record highs. This trend accelerated during the conflict, with inflation in the 19 countries sharing the euro reaching 7.5% in April.
This set the stage for the European Central Bank to eventually end years of accommodative monetary policy in the coming months – including historically low interest rates – intended to fuel economic activity.
The bank, which has a 2% inflation target, kept interest rates at zero or below and kept other market borrowing costs low by buying hundreds of billions of euros in assets on the financial markets.
Bank officials have signaled a reversal of both policies starting this summer, but are trying to balance how to target inflation without weighing on economic growth. The central banks of the United States and the United Kingdom have raised interest rates this year to counter runaway inflation.
Gentiloni on Monday would not rule out the possibility of the EU falling into stagflation – the combination of a stagnant economy and rising inflation – while saying such a risk remained remote.
“It’s possible if the negative scenario materializes, but that’s not our baseline forecast,” Gentiloni said. “But indeed, we have very high inflation and quite low growth.”