EU Cuts Euro Zone Growth Forecasts, Revises Up Inflation Outlook

The European Commission cut its forecasts for economic growth in the euro zone for this year and next and revised up its estimates for inflation on Thursday largely due to the impact of the war in Ukraine.

In its quarterly forecasts, Brussels confirmed its more downbeat outlook, which it had already discussed with euro zone finance ministers on Monday.

The EU executive now predicts growth of 2.6% this year for the 19-country currency bloc, slightly less than the 2.7% it had forecast in May.

But next year, when the impact of the Ukraine war and of higher energy prices may be felt even more acutely, growth is now forecast to be 1.4%, instead of the 2.3% previously estimated.

"A storm is possible, but we are not there at the moment," EU economics commissioner Paolo Gentiloni said, noting that the fall of the euro to parity against the dollar was a major concern largely for developing economies, rather than for the euro zone, because the euro was appreciating against other major currencies.

For the wider 27-country European Union, the growth forecast was unchanged at 2.7% this year, but revised down to 1.5% in 2023 from 2.3%.

In a major change, the Commission also raised its estimates for euro zone inflation, which this year is now expected to peak at 7.6% before falling to 4.0% in 2023.

In May, the Commission had forecast prices in the euro zone would rise 6.1% this year and 2.7% in 2023.

Brussels warned headline inflation could move even higher if gas prices soared due to Russia cutting off supplies, which might lead to a further downward revision of growth.

Risks to the outlook from a resurgence of the COVID-19 pandemic could also not be ruled out, the Commission said.

Despite these high risks, the Commission underlined that the euro zone was not expected to tip into a recession and the forecasts could also improve if recent declines of oil and commodity prices continued.

Thanks to a strong labour market with historically low unemployment rates, the Commission said private consumption could also prove more resilient to increasing prices if households were to use more of their accumulated savings.

Germany, the EU's biggest economy, would see growth slow to 1.4% this year and 1.3% in 2023. The Commission had in May forecast expansions of respectively 1.6% and 2.4%.

France is expected to grow by 2.4% this year, instead of the previously forecast 3.1%. Next year, growth is estimated to slow further to 1.4%, against 1.8% predicted in May.

Among the three biggest economies of the bloc, Italy is the only one that is expected to grow this year by more than previously forecast. It is now seen to expand by 2.9%, rather than the 2.4% estimated in May.

However, the country is expected to experience a marked slowdown next year, when growth is predicted at 0.9%, the lowest in the euro zone and down from a previous forecast of 1.9%.

Gentiloni said that political stability in Italy was particularly important in the current situation, when asked to comment about the risk of the Italian government collapsing..