The war in Russia continues to darken the European economic horizon. The European Commission has updated its macroeconomic projections for the EU as a whole towards more pessimism for the third time in a row since November, when a strong post-pandemic recovery was expected that has been cut short by the invasion of Ukraine. In the case of Spain, at 4% for this year, but the blow is expected to come in 2023, when Brussels cuts its forecasts from 3.4% to 2.1%. And inflation will shoot up much more than expected last spring. Prices will close 2022 8.1% more expensive. In May, Brussels forecast an increase in the Spanish CPI of 6.3%.
These forecasts are generally more pessimistic than the latest ones presented by the Spanish government, which at the end of April assured that the country’s economy would grow by 3.5% the following year. In its analysis, the European Commission explains that the worsening of the Spanish data is mainly explained by a more pronounced impact of inflation on the purchasing power of households, particularly at the beginning of the year, “in a context of limited wage increases “.
And all this data is surrounded by downside risks that the European Commission has in mind but does not reflect on paper, such as a complete cut off of Russian gas. Although the Commissioner for the Economy, Paolo Gentiloni, has acknowledged that this scenario is already more than hypothetical, this update of the macroeconomic forecasts does not take it into account. Earlier in the week, Gentiloni admitted that in that case a recession would be almost inevitable.
Less growth and more inflation for everyone
Thus, for now, Brussels is holding out and continues to forecast growth, albeit weaker. For the European Union as a whole, growth forecasts worsen by one tenth this year, with a rise in GDP of 2.6% and inflation soaring to 8.3%, higher than that forecast only for Spain. However, the base scenario is that prices reach their maximum at the end of the last quarter and begin to decline in 2023. Thus, the community executive forecasts inflation of 4.6% for 2023 in the Union as a whole, and a 4% by 2023, levels much lower than those that will be registered this year but that are still double the objectives set by the European Central Bank (ECB).
It is always illustrative to observe the behavior of the German economy, the locomotive of Europe, to get an idea of the health of the economy as a whole. In this case, its expected growth is below the European average and worsens considerably. If in May Brussels predicted that its GDP would advance by 1.6% in 2022 and 2.3% in 2023, now it believes that it will only manage to grow by 1.4% this year and 1.3% the following.
The risks: gas, drought and the pandemic
Undoubtedly the main culprit for the failure of the European economies to grow at the rate expected months ago is the war in Russia and the resulting energy crisis. “The EU economy remains particularly vulnerable to developments in energy markets due to its high dependence on Russian fossil fuels and weakening global growth detract from external demand,” notes the European Commission.
At a global level, there are several contrary factors that conspire against the European economy. “More reductions in the supply of gas to the EU would raise its prices,” says the Commission, which also recalls that the probability of gas rationing this winter would have “important repercussions on economic activity.” In addition, the current drought in the south of the EU could affect the production of basic agricultural products, exerting pressure on their prices.
In addition, Brussels recalls that a worsening of the pandemic situation cannot be ruled out once the cold returns. In this sense, he concludes that “more lockdowns in China or potentially in other countries would not only reduce global demand, but would further complicate bottlenecks in supply chains.”
“Russia’s war against Ukraine continues to cast a long shadow over Europe and our economy. We face challenges on multiple fronts, from rising energy and food prices to a highly uncertain global outlook,” the vice president said. Commission executive, Valdis Dombrovskis.
The Latvian warns in turn that “in view of high inflation and the tightening of financing conditions, it will be important to find the right balance between moving towards a more prudent fiscal policy and protecting the most vulnerable”. The Eurogroup to start reducing spending precisely in the face of this fear.
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