The European Commissioner for the Economy, Paolo Gentiloni, presented, on Thursday 14 July, an interim summer economic forecast downgraded from the spring forecast, mainly due to the consequences of the Russian military aggression against Ukraine, which is exacerbating a pre-existing rise in energy prices.
The Summer Forecast for real gross domestic product growth in 2022 remains unchanged: it was estimated at 2.7% in 2022 in the European Union and 2.6% in the euro area, compared to 2.7% in the Spring Forecast (see EUROPE 12953/20).
For 2023, the picture is bleaker: the Commission makes a correction of 0.8 percentage points to its spring forecast, with growth expected to be 1.5% for the European Union and 1.4% for the euro area. Both forecasts were 2.3% in the spring.
The European Commission says that several risks identified in its earlier forecasts have materialised: the contraction of the US economy, a slowdown in several Asian countries, but also disruptions to supply chains caused by China’s tight restrictions in response to Covid-19. In addition, in response to inflation, monetary policy was tightened outside the euro area and in the euro area earlier than expected.
The Commission is raising its inflation forecast by more than a percentage point. Headline inflation forecasts measured in terms of the harmonised index of consumer prices for 2022 are now 8.3% in the EU and 7.6% in the euro area (compared with 6.8% and 6.1% in the Spring). For 2023, inflation is estimated at 4.6% in the EU and 4% in the euro area (compared to 3.2 and 2.7% in the Spring), although the Commission expects it to ease to below 3% in 2023.
While bottlenecks and pressure on certain goods persist, the main driver of overall inflation remains the rise in energy prices, which has eased in recent months, with the exception of gas prices, which continue to rise, partly due to uncertainties over Russian gas supplies. “The risk of a storm is more than hypothetical: it is becoming a possibility, but we are not there yet”, said Mr Gentiloni. The Commission expects energy prices to remain high in the future.
Core inflation reached 4.6% year-on-year in June. The contribution of domestic price inflation is increasing as inflationary pressure spreads to other aggregates: food, alcohol and tobacco prices and services (whose annual inflation rates remain high, despite a dip in recent weeks). While the Commission expects moderate wage growth, it does not foresee persistent wage-inflation circles.
The institution stresses the resilience of the labour market, even if the growth in the employment rate is expected to wane.
On the latest developments in the euro-dollar exchange rate, Commissioner Gentiloni said: “the euro is showing its strength but the dollar is strengthening more”. He was also asked about the political situation in Italy and concluded: "We are concerned and surprised.
These indicators cover large disparities between Member States, especially in terms of inflation, where there is marked heterogeneity between euro area and non-euro area Member States, particularly in Eastern and Central Europe.
The Baltic countries are expected to suffer the most from inflation in 2022, with rates at 17% for Latvia and Estonia and 15.5% for Lithuania. This is due to rising energy costs and supply disruptions, as their sources of supply are less diversified. Food and non-energy prices are also a factor. In Lithuania, for example, this could be due to sustained demand and rising labour costs. Six other countries - the Czech Republic, Bulgaria, Poland, Hungary, Romania and Slovakia - have double-digit inflation.
France and Malta are the only countries to keep inflation below 6% in 2022. France experienced a slight slowdown in energy-related inflation due to large base effects. Malta, on the other hand, has managed to limit energy prices through state intervention and hedging contracts for gas supply. However, it is not immune to rising international energy and commodity prices.
However, the Commission notes that the inflation gap is expected to narrow in 2023, ranging from 2.8% in Finland to 9% in Poland.
On the growth side, there are also large differences: 1.3% for Sweden and 6.5% for Portugal in 2022. Mr Gentiloni explained that the return of post-pandemic international tourism should indeed have a beneficial effect on the country’s economy. He stressed that the Covid-19 pandemic remains a risk to the economy, especially in the event of further pandemic control measures.
With a growth rate of 1.4%, Germany, for example, has seen its forecasts lower than in the spring. Household purchasing power is being eroded by inflation, while supply bottlenecks and ever-rising input costs are holding back industry. But the gaps should also close in 2023.
Link to forecast: https://aeur.eu/f/2n8 (Original version in French by Emilie Vanderhulst with Anne Damiani)