EU cuts 2023 growth view to 0.3%, sees inflation at 6.1% on Ukraine war fallout

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The European Commission lowered 2023 growth expectations for the eurozone economy and raised inflation forecasts on Friday, with Russia’s invasion of Ukraine denting global demand and reinforcing inflationary pressures.

Gross domestic product in the 19-member eurozone is forecast to grow by just 0.3% in 2023, the Commission said in its quarterly report, downgrading its July forecast of a 1.4% expansion. Eurozone economic growth is projected at 1.5% in 2024.

Real GDP growth in the eurozone surprised on the upside in the first half of 2022, as consumers resumed spending, particularly on services, after the easing of Covid-19 restrictions, the Commission said, raising its forecast for GDP growth in 2022 to 3.2% from 2.6% forecast in July.

However, in the second half of 2022, the eurozone economy entered a more challenging phase. Elevated uncertainty stemming from the Russia-Ukraine conflict, high energy prices, the erosion of households’ purchasing power, a weaker external environment and tighter financing conditions are expected to tip the eurozone economy into recession in the fourth quarter, the report said.

The economic contraction is expected to continue in the first quarter of 2023. The European Commission said growth is expected to return to the eurozone in spring, as inflation gradually relaxes its grip on the economy. However, with powerful headwinds still holding back demand, economic activity is set to be subdued, the EU warned.

The EU is among the most exposed advanced economies to Russia’s war in Ukraine due to its geographical proximity to the conflict and heavy reliance on gas imports from Russia. The dependence on Russian energy is stronger in Germany, the only country among the four largest eurozone economies which is expected to post a GDP contraction in 2023. The Commission forecasts that the German economy will contract by 0.6% in 2023, sharply cutting its July forecast of 1.3% GDP growth.

Higher-than-expected inflation readings throughout the first 10 months of 2022 and broadening price pressures are expected to have moved the inflation peak to year-end, the European Commission said in its Autumn Economic Forecasts. According to the preliminary estimate, headline inflation in the eurozone surged to 10.7% in September, the highest rate in the history of the monetary union.

Inflation in the eurozone is projected at 8.5% in 2022, up from 7.6% in July’s forecasts. Inflation is expected to decline in 2023, but to remain high at 6.1%, up from 4.0% previously forecast. For 2024 the Commission forecasts inflation at 2.6%. These revisions reflect significantly higher wholesale gas and electricity prices, which exert pressure on retail energy prices, as well as on most goods and services in the consumption basket, the Commission said.

Despite the challenging environment, the eurozone labor market has continued performing strongly, with employment and participation at their highest and unemployment at its lowest in decades. The unemployment rate was at a record-low of 6.6% in September.

“Labor markets are expected to react to the slowing of economic activity with a lag, but to remain resilient,” the Commission said. The eurozone unemployment rate is forecast at 6.8% in 2022, rising to 7.2% in 2023, before falling to 7.0% in 2024.

Strong nominal growth in the first three quarters of the year and the phasing out of pandemic support have been driving a further reduction of government deficits in 2022, however, the aggregate government deficit is set to slightly increase again in 2023, as economic activity weakens, interest expenditure increases, and governments introduce new measures to mitigate the impact of high energy prices. From 3.5% of GDP in 2022, the deficit in the eurozone is forecast to rise to 3.7% of GDP in 2023 and fall to 3.3% in 2024.

Risks to the forecast are heavily dependent on the evolution of the war in Ukraine and, in particular, its impact on energy markets, the Commission said.

Write to Maria Martinez at maria.martinez@wsj.com

This article was originally published by Marketwatch.com. Read the original article here.

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