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EU slashes growth, increases inflation forecast

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The war in Ukraine pushed the European Commission to slash its annual growth expectation to 2.7% for both the EU and eurozone this year, down from the previous forecast of 4%, the EU executive announced Monday, according to Politico.

The Commission also hiked its inflation forecast to 6.1% for the eurozone and 6.8% for the bloc as a whole, a near-doubling of its previous forecast of 3.5% and 3.9%, respectively.

Two percentage points of the updated GDP forecast are owed to the rebound effect from last year, the EU executive said. Growth is expected to slow to 2.3% next year in both the EU and eurozone.

Across the bloc, the growth picture is mixed: Germany saw two percentage points shaved off its forecast, now at 1.6%, while Italy is down to 2.4% from 4.1% previously. Meanwhile, countries least affected by the rise in energy prices — like Spain, Portugal, France and Ireland — continue on a higher-than-average growth trajectory.

Under the baseline scenario, inflation would peak at 6.9% in the current quarter in the eurozone, and decline gradually to 2.7% in 2023. EU-wide inflation would fall back to 3.2% next year. 

“This forecast is however subject to high uncertainty and risks that are closely linked to the development of Russia’s war,” warned Economy Commissioner Paolo Gentiloni. “Other scenarios are possible under which growth may be lower and inflation higher than we are projecting today.”

A halt in gas supplies would further drag GDP growth down by up to 2.5 percentage points this year and 1 percentage point in 2023, while adding three additional percentage points to inflation this year, and more than one in 2023, the Commission said.