Europe to See Slower Growth For Two Years, Inflationary Pressures to Persist

European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium, on July 14, 2021. (Yves Herman/Reuters)

The European Commission has released its Winter 2022 Economic Forecast for this year and the next, predicting a slower pace of growth when compared to 2021 due to high energy costs, supply chain issues, and the disruptions from COVID-19.

Last year, the European Union’s (EU) economy expanded by 5.3 percent. For 2022, the commission expects growth to fall to around 4 percent, declining further to 2.8 percent in 2023, according to a Feb. 10 Economic Forecast press release. The EU reached its pre-pandemic GDP level in the third quarter of 2021. By the end of 2022, all member states are expected to have passed this milestone.

In spring last year, the EU saw a rebound in economic activity that continued strongly for the first three quarters. In the last quarter, growth slowed to 0.4 percent. Though such a slowdown was expected, it was “sharper than projected” as challenges to growth intensified.

Such challenges included the surge in COVID-19 infections due to the spread of the Omicron variant, supply chain disruptions, and high energy prices. These pressures are expected to continue to some degree this year as well.

Economic growth will be affected as shortages of semiconductors, some critical metals, and other supply bottlenecks will weigh on the region’s production activity for at least the first half of 2022.

Energy prices are predicted to remain elevated, acting as a drag on economic growth as well as boosting inflationary pressures. In the long term, the commission sees the EU’s expansionary phase to remain strong due to favorable financing, high household savings, a strong labor market, etc.

In Q4, 2021, inflation in the euro bloc reached a record rate of 4.6 percent. For the first quarter of this year, the commission expects inflation to peak at 4.8 percent. Until the third quarter, inflation is projected to remain above 3 percent after which it might decline to 2.1 percent due to easing down of energy prices and supply constraints.

European inflation is pegged at 3.5 percent for 2022, up from 2.6 percent last year. This will then move below the European Central Bank’s target of 2 percent in 2023, the European Commission stated.

“The significant rise in inflation and energy prices, along with supply chain and labor market bottlenecks, are holding back growth. Looking ahead, however, we expect to switch back into high gear later this year as some of these bottlenecks ease. The EU’s fundamentals remain strong and will be boosted further as countries start to put their Recovery and Resilience Plans into full effect,” said Valdis Dombrovskis, Executive Vice-President for Economy that Works for People, in the report.

Uncertainty and risks regarding the winter forecast “remain high,” with the main reason being the unpredictability of the COVID-19 pandemic, said Paolo Gentiloni, the Commissioner for Economy at a press conference revealing the report.

Germany, which grew by 8 percent in 2021, is predicted to grow by 3.6 percent in 2022 and 2.6 percent in 2023. For other major nations like France, Italy, and Spain, growth for 2022 is expected to be 3.6 percent, 4.1 percent, and 5.6 percent.