European economic growth revised down amid Ukraine war

May 18, 2022 - 13:41

The European Union has sharply revised its economic growth prospects downwards as a result of the war in Ukraine.

The armed conflict between Russia and NATO backed Ukraine has sent energy prices skyrocketing which in turn has pushed up inflation even further on the continent 

The European Commission says the revised economic forecast comes at a time when the EU expected it to ease.

The Ukraine war has made matters worse. The commission now expects growth in 2022 at just 2.7 percent in the 19-nation eurozone as well as the broader 27-nation European Union – down from a forecast of 4 percent in growth just three months ago.

The commission has further warned that a complete halt in supplies of Russian gas would cut a further 2.5 percent off growth, taking the economy to a virtual standstill this year.

Analysts say the irony is European Nations with the exception of Hungary have been pushing for sanctions on Russian energy; in effect destroying Europe’s economy at the expense of European households who will have to pay the price of increased energy bills. 

As many European countries are heavily dependent on Russian energy exports, economic growth is expected to slow even further next year – to 2.3 percent in the EU and the eurozone.

This is while inflation, which is already at its highest in the eurozone since the creation of the single currency more than two decades ago, is expected to average 6.1 percent this year, up from 3.5 percent in the last set of commission predictions in February. 

Critics say the EU leader’s push for more sanctions on Russian energy exports is a completely wrong policy as the bloc is only going to suffer further and the Russian economy has not taken the expected hit. 

Even worse; the commission has admitted that EU-wide inflation is expected to average 6.8 percent and in the event of a Russian gas ban, Inflation would average close to 10 percent. 

In a statement, the commission said “the outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion, But it says Russia’s war in Ukraine “has posed new challenges, just as the union had recovered from the economic impacts of the pandemic.”

Critics have argued the EU can reverse the rising inflation figures and poorer economic growth for its citizens by backing the peace process in the Ukraine war instead of pressing ahead with sending more weapons. 

This year, the fastest growing economy in the EU is expected to be Portugal, at 5.8 percent while Germany (the economic powerhouse of Europe) is forecast to be the weakest at 1.6 percent.

Valdis Dombrovskis, an EU trade commissioner, said: “there is no doubt that the EU economy is going through a challenging period due to Russia’s war against Ukraine, and we have downgraded our forecast accordingly.”

Dombrovskis acknowledged “the overwhelming negative factor is the surge in energy prices, driving inflation to record highs and putting a strain on European businesses and households. While growth will continue this year and next, it will be much more subdued than previously expected. Uncertainty and risks to the outlook will remain high as long as Russia’s aggression continues.”

The spike in energy costs has also dragged the Eurozone into a record trade deficit with the rest of the world.

The latest trade data also shows in March 2022 the euro area recorded a €16.4bn deficit in goods trade with the rest of the world, compared with a surplus of €22.5bn in the same month last year. 

The wider EU recorded a €27.7bn deficit in trade in goods in March.
In January-March, the EU ran up an €81.5bn deficit in trade in goods, compared with a €48.5bn surplus a year earlier.

The EU has further acknowledged that risks to the forecast of its economic activity and inflation are heavily dependent on how the Ukraine war unfolds, and especially on its impact on energy markets.

Valdis Dombrovskis, the Executive Vice-President of the European Commission for an Economy that Works for People says “without a doubt the EU economy is going through a challenging period” due to the war in Ukraine.

He says “we have downgraded our forecast accordingly. The overwhelming negative factor is the surge in energy prices, driving inflation to record highs and putting a strain on European businesses and households. While growth will continue this year and next, it will be much more subdued than previously expected.”

Dombrovskis warns “the overwhelming negative factor is the surge in energy prices, driving inflation to record highs and putting a strain on European businesses and households. While growth will continue this year and next, it will be much more subdued than previously expected. Uncertainty and risks to the outlook will remain high,”

Meanwhile, Paolo Gentiloni, the EU Commissioner for Economy says the Russian military operation in Ukraine is “also weighing on Europe’s economic recovery. The war has led to a surge in energy prices and further disrupted supply chains, so that inflation is now set to remain higher for longer.”

Gentiloni added that “other scenarios are possible under which growth may be lower and inflation higher than we are projecting today.”

This is while in the United Kingdom the 
average price of a liter of diesel has hit a high of just over £1.80 per liter and could rise even further if the EU ban on Russian oil goes ahead.

The Royal Automobile Club (RAC) has reported that the price a liter in the UK has outstripped the previous record of £1.79, set in March after Moscow’s invasion of Ukraine.

High diesel prices are a warning sign for the economy as the fuel is typically used in vans and lorries owned by businesses, driving up their costs.
The RAC said petrol prices were also rising – up three pence since the start of the month at 166.65p on average, a penny shy of the record high set in March.

Campaigners now argue the price rises have rendered the five pence fuel duty cut announced by the chancellor, Rishi Sunak, in his spring statement in March as totally ineffective. 

The RAC’s fuel spokesperson, Simon Williams, says “unfortunately, drivers with diesel vehicles need to brace themselves for yet more pain at the pumps,”

Williams warned that “while the wholesale price has eased in the last few days, this is likely to be temporary, especially if the EU agrees to ban imports of Russian oil.”

EU diplomats are widely believed to still be aiming on an agreement that will see a phased embargo on Russian oil this month.

The British government’s tax cuts for motorists at the petrol stations has backfired while it continues to blame Moscow for the energy mess back home. 

Last week the Office for National Statistics said that prices at the pump were contributing to the cost of living crisis as it revealed that the UK’s economy shrank in March.

The British inflation rate is widely expected to hit its highest point in 40 years and exceed ten percent, the Bank of England has already warned it will cause the economy to shrink. Experts say a recession is entirely possible.

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