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The worst may be yet to come: the European Commission predicts a darkening of the economic climate



The European Commission’s summer economic forecasts are not good, and no one will be surprised. Russia’s war of aggression in Ukraine continues to affect the economy of the European Union (EU).
According to the Commission, the momentum of ...-Covid recovery will continue in 2022 with a growth of 2.7% in gross domestic product for the EU and 2.6% for the euro zone. However, growth rates will decrease significantly in 2023: it will stand at 1.4% for the EU and 1.3% for the euro zone. This is significantly less than the 2.7% announced last May for the spring forecasts. “You could say that the European economy is moving from a phase of slow growth to a phase of slowdown”, commented the European Commissioner in charge of the Economy, Paolo Gentiloni. The growth of the Belgian economy would be better than expected in 2022 (2.3% instead of the 2% announced in the spring), but less good in 2023 (1.3% instead of 1.8%), according to the Commission .

The risks envisaged by the Commission in its spring forecast “have materialized”, noted the Italian: “Shocks resulting from the unpredictable evolution of the energy markets”, “a tightening of financial conditions”, with the rise in interest rates, “a more marked economic slowdown in the United States” and “less than expected Chinese economic activity” due to the drastic containment measures put in place by Beijing to fight the Covid epidemic -19

Inflation breaks records

Inflation is reaching record levels. The attack on Ukraine by Russia contributes to the phenomenon, “by exerting additional upward pressure on the prices of energy and food raw materials”, pinpoints the Commission. Russia, which is the leading supplier of hydrocarbons to the countries of the European Union, uses energy as a means of pressure and destabilization. It does the same for agricultural products, also blocking Ukrainian exports. “These factors are fueling global inflationary pressures that are eroding household purchasing power,” the Commission notes.
Race result: Inflation rose sharply again in the second quarter of 2022, from 7.4% in March (year-on-year) to a new all-time high of 8.6% in June for the euro zone – 8.8% for the whole of the Union. The forecasts have been revised considerably upwards compared to the spring estimates, due in particular to a further rise in gas prices in Europe which should be passed on to consumers also via electricity prices (still calculated on base of the most expensive energy used to produce it). The Commission expects inflation to peak at 8.4% year-on-year in the third quarter of 2022 in the euro area. It should then decline steadily and fall below 3% in the last quarter of 2023, both in the euro zone and in the EU, as the pressure on energy prices and the problems supply.

The European inflation map shows that Portugal, France, Sweden and Finland are doing the best with a rate below 7%. This rate exceeds 7% for Germany and the countries of the South and 9% for a series of countries, including Belgium (9.4%). The situation is particularly tense in the majority of Central and Eastern European countries, where inflation exceeds 11%, with peaks of 15.5% in Latvia and 17% in Lithuania and Estonia.

The fear is that the wage increases decided to respond to the increase in the cost of living will in turn accentuate inflationary pressures and lead to an increase in interest rates, which would weigh on growth, but also on financial stability, warns the Commission.

A worst-case scenario: a sudden cut in Russian gas

The worst may be yet to come, admits Paolo Gentiloni, who warns that the forecasts presented on Thursday are “subject to high uncertainty and downside risks”.
Entrepreneur confidence is at half mast, which could have an impact on investments. A resurgence in Covid cases is one element that could disrupt and weaken the European economy. However, the most significant and highest risks are linked to the evolution of the conflict that Russia is waging in Ukraine.
Already in the spring, the Commission was considering a worst-case scenario fueled by a decision by Moscow to cut off gas supplies to EU member states. It would lead “to plunge the European economy into recession in the second half of the year and to further depress economic activity” in 2022, fears the Commissioner for the Economy. “In light of recent events, this risk has become more than a hypothetical scenario, so we must prepare ourselves. The storm is possible, even if we are not there at the moment”, concludes Paolo Gentiloni.




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