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Russia’s war to hit EU economy, fueling inflation

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BRUSSELS – Russia’s war in Ukraine is expected to wreak havoc with the EU’s economic recovery with low annual growth and record-high inflation for the foreseeable future, the bloc’s economic forecast showed on Thursday.

Summer data for the 19 countries that use the euro set inflation to reach an average of 7.6% this year, a sizable increase from the 6.1% expected in May. Last month, consumer prices rose 8.6% from a year earlier.

Economic growth expectations for the year fell 0.1 points to 2.6%, a significant drop from the previous year’s expansion of 5.3%. Next year, however, when the war impacts the economy as a whole, growth will fall to 1.4%, far below May’s estimate of 2.3%.

“Russia’s war against Ukraine is casting a long shadow on Europe and our economy,” said European Union vice-president Valdis Dombrowski.

The war has increased energy and food prices, driving a galloping inflation rate and stifling economic growth and consumer confidence.

Fears are growing that Europe’s energy crisis could get worse and even lead to a recession if Russia further reduces natural gas supplies or turns off the tap altogether Countries scramble to replenish their reserves in preparation for winter.

The European Union acknowledged that Russian President Vladimir Putin could keep the European economy out of balance for months to come and made any forecast highly uncertain.

“The risks are inevitably linked to the development of war. Further cuts in the supply of gas to the EU will lead to higher prices and increase stagflation forces,” said economy commissioner Paolo Gentiloni.

Europe’s bearish economic prospects – and a stronger US dollar – are behind another hard sign: the euro is hovering near parity with the dollar after falling to its lowest level against the US currency in 20 years.

However, Gentiloni said the euro still underperformed against other major currencies such as the British pound and the Japanese yen.

“You can see that the problem is not the weakness of the euro, which is stronger than before against the pound or the yen. But you can see that the dollar is appreciating,” Gentiloni said. “The euro is showing its strength, but the dollar is getting stronger.”

Most of the risks have already materialized, with the recent rise in COVID-19 cases creating new shocks.

“It is likely that a resurgence of the pandemic in the EU will lead to a renewed disruption in the economy,” Gentiloni said.

Overall, he added that “with the reliability of the wartime and unknown gas supplies, this forecast is subject to high uncertainty and downside risks.” Volatility could also tilt to the other side, with the possibility that commodity and energy prices could decline at a faster rate than they are now.

Following this year’s dark forecast, eurozone inflation is set to rise to 4% in 2023, yet a massive increase on the spring forecast of 2.7%.

It’s all a stark contrast from a year ago, when the EU was bouncing back from the pandemic and ready for prosperous times again.

Eurozone countries will also face higher borrowing costs, with the European Central Bank set to raise interest rates for the first time in 11 years next week to combat runaway price hikes.

Inflation is driven by the energy crisis in the European Union, which for years relied heavily on Russian oil, natural gas and coal to help power cars, factories, heating systems and power plants.

And even though the EU has imposed sanctions and plans to oust coal and oil from Russia, it is still dependent on the country’s natural gas.

European Commission chief Ursula von der Leyen said last week that the bloc needed to create an emergency plan to prepare for a complete cut of Russian gas. If this comes into effect, it could have a major impact on the economy.

Gentiloni said that, with few options available in the short term, “this ‘serious scenario’ will see the EU economy in recession in the second half of this year and further curtail economic activity next year. In light of recent events, It risks becoming more than just a hypothetical scenario.”

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