Ukraine war to slash eurozone 2022 growth, boost inflation

Uncertainty is complicating the economic outlook across the euro zone. The European Commission on Monday cut its growth forecast.
European Union flags fly outside the European Commission headquarters in Brussels, Belgium, 6 March 2019.
European Union flags fly outside the European Commission headquarters in Brussels, Belgium, 6 March 2019.

Russia's invasion of Ukraine and the resulting surge in energy and commodity prices will slash eurozone economic growth this year and next, while boosting inflation to record levels, the European Commission forecast on Monday.

The Commission cut its growth forecast for the 19 countries sharing the euro to 2.7% this year from 4.0% predicted only in February, shortly before the war in Ukraine started. Growth will then slow to 2.3% next year, also below the 2.7% seen before.

The forecast is the first comprehensive estimate of the economic cost of the conflict in its neighbour for the euro zone and the wider 27-nation EU.

"The outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion. But Russia's invasion of Ukraine has posed new challenges, just as the Union had recovered from the economic impacts of the pandemic," the Commission said in a statement.

"By exerting further upward pressures on commodity prices, causing renewed supply disruptions and increasing uncertainty, the war is exacerbating pre-existing headwinds to growth, which were previously expected to subside."

Inflation could also continue its rise

The Commission said the European economy would be hit even more severely if Russia were to cut off gas supplies to the EU, estimating such a development would reduce the projected growth by 2.5 percentage points in 2022 and 1 percentage point in 2023. That would set off a recession, it said.

Inflation, which the European Central Bank wants to keep at 2.0%, will be 6.1% this year, the Commission forecast, falling to 2.7% — still well above the ECB's target — next year. Before the war, the Commission expected prices to grow 3.5% in 2022 and 1.7% in 2023.

The scenario of an abrupt cut-off by Russia of gas supplies would boost inflation by an additional 3 percentage points in 2022 and an extra 1 percentage point in 2023, the Commission said.

"Uncertainty around the outlook has clearly increased, and risks have tilted to the downside and are predominantly related to the duration of the war," EU Economic Commissioner Paolo Gentiloni told a news conference.

Despite government spending to cushion surging energy prices and support millions of refugees from Ukraine, the aggregate EU government deficit should fall in 2022 to 3.6% of GDP from 4.7% in 2021 as temporary COVID-19 support measures are withdrawn. It should fall to 2.5% in 2023, the Commission said.

In the euro zone, the aggregate deficit is to halve to 3.7% this year against 2021 and fall further to 2.5% next year while aggregated eurozone public debt is to fall to 94.7% of GDP from 97.4% in 2021 and ease further to 92.7% in 2023.

Also, despite the slower growth, eurozone unemployment is to fall further to 7.3% of the workforce this year and to 7.0% in 2023 from 7.7% in 2021.