Due to the high economic uncertainty caused by Russia’s invasion of Ukraine, the European Commission significantly lowered, on Monday 16 May, its growth forecasts for both the euro area and the European Union from 4.0 to 2.7% of GDP in 2022 compared to the winter economic forecasts presented in February before the outbreak of the war (see EUROPE 12888/5).
For 2022, this revision of 1.3% percentage points is “one of the steepest between forecasts downgrades of recent years”, noted the European Commissioner for Economy, Paolo Gentiloni. The Commissioner pointed out that, of the 2.7% GDP growth figure, 2 percentage points are derived from last year’s growth achievement, so that, if this achievement is disregarded, the forecast for growth only produced in 2022 has been cut from 2.1% to 0.8%.
As always, there are significant differences between Member States. This year, growth is expected to be strongest in Portugal (5.8%) and Ireland (5.4%) and weakest in Estonia (1.0%), Finland and Germany (both 1.6%). It is expected to be 4.0% in Spain, 3.1% in France and 2.4% in Italy.
For 2023, while the Commission expected GDP growth of 2.8% in the euro area and 2.7% in the EU, production of wealth is expected to reach only 2.3% in both geographical areas.
Unsurprisingly, the war in Ukraine and its economic consequences are the major risk to the European economy. These factors have, in effect ,exacerbated trends already observed in the acute phase of the Covid-19 pandemic, including record inflation, mainly caused by soaring commodity prices, supply problems, a revaluation of asset valuations in financial markets, and a negative impact on business and consumer sentiment.
Among the factors stimulating the economic rebound observed when the health measures were gradually phased out in 2021, the Commission mentions the robustness of the labour market (unemployment at 7.3 and 6.7% respectively in the euro area and the EU in 2022), household consumption, the maintenance of favourable financing conditions and the deployment of the Next Generation EU recovery plan.
In contrast to the growth forecasts, the inflation forecasts for 2022 have been significantly revised upwards from 3.5% in February to 6.1% before falling back to 2.7% in 2023. According to Mr Gentiloni, annual price increases are expected to peak in the second quarter of this year at 6.9% before gradually declining in the second half of the year, in line with the trajectory of energy prices.
Stagflation? Asked by EUROPE whether there was a risk of stagflation, Mr Gentiloni did not totally rule it out, although at this stage it is not the most likely scenario.
“We have a very high level of inflation and one of the deepest downward for growth in our seasonal forecasts. But until now, this is not bringing growth into negative territory. Of course, this is possible, if the negative scenario materialises but this is not our base forecast”, he said.
In addition to its baseline scenario, the Commission services also modelled a scenario with even higher energy prices and a cut-off of Russian gas supplies to the EU. According to this more severe scenario, the average GDP growth rate would be revised downwards by 2.5 percentage points in 2022 and one percentage point in 2023 compared to the baseline scenario, while inflation would be revised upwards by 3 percentage points in 2022 and more than one percentage point in 2023. And, according to Mr Gentiloni, the wealth produced only in 2022 would enter negative territory this time.
Consolidation of public finances. In terms of consolidation of public finances, the Commission expects public deficits and public debt to continue to decline as Member States phase out emergency measures in place during the acute phase of the pandemic.
Thus, at the level of the euro area, the average deficit is expected to decrease from -5.1% of GDP in 2021 to -3.7% in 2022 and to -2.5% in 2023. At EU level, the average trajectory would be as follows: -4.7% of GDP in 2021, -3.6% in 2022 and -2.5% in 2023.
Again, there will be significant differences between Member States. The government deficit will be highest in Romania (-7.5%) and Latvia (-7.2%) and lowest in Luxembourg (-0.1%) and Cyprus (-0.3%). The public deficit will reach -2.5% in Germany, -4.6% in France, -4.9% in Spain and -5.5% in Italy.
With regard to public debt, the average debt-to-GDP ratio will continue to decline from 97.4% in 2021 to 94.7% in 2022 and 92.7% in 2023 in the euro area and from 89.7% in 2021 to 87.1% in 2022 and 85.2% in the EU over the same period.
In relation to national GDP, the six countries that will have a public debt of more than 100% in 2022 are: Greece (185.7%), Italy (147.9%), Portugal (119.9%), Spain (115.1%), France (111.2%) and Belgium (107.%).
See the Spring 2022 Economic Forecast: https://aeur.eu/f/1nl (Original version in French by Mathieu Bion)