Russia's invasion of Ukraine is generating fresh headwinds that will choke the European economy, reveal official forecasts published today. Surging energy prices caused by concerns over supply security following Moscow sending troops into Ukraine are set to strain households and businesses on the Continent.
High input prices are likely to weigh on production, while elevated living costs will push spending lower than first expected.
Weaker projected activity levels led the European Commission today to downgrade its forecasts for growth in the bloc to 2.7 percent this year from four percent just a few months ago.
The downgrade came as analysts at Dutch bank ING warned a slow down in retail sales and "anti-Covid lockdowns" will result in China's economy shrinking one percent this quarter.
Paolo Gentiloni, Commissioner for Economy, said: "Russia's invasion of Ukraine is causing untold suffering and destruction, but is also weighing on Europe's economic recovery."
"The war has led to a surge in energy prices and further disrupted supply chains, so that inflation is now set to remain higher for longer."
The Commission now expects inflation to peak at 6.9 percent in the second quarter of this year and decline thereafter.
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Despite historic high price rises, the European Central Bank has yet to take interest rates out of negative territory where they have been for around a decade.
The Bank of England became the first top monetary policy to lift rates last December, while the US Federal Reserve lifted borrowing costs 50 basis points at its last meeting for the first time since 2000.
Inflation is running at seven percent in the UK, a 30-year high, while it is at a 40-year high across the pond at 8.3 percent.
Europe is heavily reliant on Russia for gas, meaning higher prices and supply disruption caused by the war will make it challenging for businesses to maintain normal production levels.
Germany's - the Continent's economic power house - industrial sector generates a large proportion of its national output. Energy shortages and higher gas prices will likely choke the country's economy.
The IMK Institute estimates a sudden embargo on Russian energy in an attempt to ratchet up sanctions could deal between €114bn and €286bn blow to the European economy, representing around three percent to eight percent of GDP.
Berlin has been resistant to a full-blown Russian gas ban but has backed an oil embargo by the end of the year.
Similar to other prosperous nation economies, Europe's labour market is in rude health. "Unemployment rates are forecast to decline further, to 6.7 percent this year and 6.5 percent in 2023 in the EU," the Commission said.
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Comments
The premium which the Ukraine conflict initially added to energy prices has now fizzled out leaving prices to market forces in a market in its most bullish state since 2014 and a robust global oil demand which continues to push energy prices higher.
And while the EU has today downgraded its forecasts for growth from 4% a few months ago to 2.7% this year, a ban on Russian energy imports could deal between €114bn and €286bn blow to the EU economy, representing around 3%-8% of GDP. Moreover, inflation could hit 6.9% in the second quarter of this year.
Meanwhile, more bravadoes by the EU and Germany in particular about embargoing Russian oil and gas imports could plunge the EU economy into zero growth this year and probably next year.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London