EU Lowers Eurozone Economic Growth Forecast... "Uncertainty Risks Increase" (Comprehensive)

GDP Growth Forecast Adjusted from 4.3% to 4.0%
Inflation Forecast Sharply Raised from 2.2% to 3.5%
Ukraine Crisis Pressure Intensifies...Eastern Europe Inflation at 6% Range

[Image source=AP Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] The European Union (EU) Commission has downgraded its economic growth forecast for this year. This is interpreted as taking into account various adverse factors such as the ongoing impact of COVID-19, intensifying inflation, and the full-scale tightening policy of the United States. In particular, concerns are growing that the sharp rise in energy prices following the Ukraine crisis will exert significant pressure on the economy.

On the 10th (local time), the EU Commission announced in its "2022 Winter Economic Forecast" that it has lowered the real gross domestic product (GDP) growth forecast for the Eurozone, the countries using the euro within the EU, to 4.0% year-on-year. The previous forecast announced in November last year was 4.3%.

The main reason for the downward revision of the economic growth rate is attributed to the intensification of inflation. The EU Commission revised its inflation forecast for this year to 3.5% for the Eurozone and 3.9% for the EU. This is a significant upward revision compared to the November forecast of 2.2% for the Eurozone and 2.5% for the EU.

In particular, the sharp rise in energy prices such as natural gas due to the Ukraine crisis has been found to be exacerbating inflation. On this day, the natural gas futures price at the Netherlands TTF exchange, a natural gas price indicator in Europe, was recorded at 74.77 euros (about 102,300 won) per 1MMbtu (one million British thermal units). This price is more than 318% higher than the same month last year. Although it has decreased compared to the 160-euro range in December last year when Russia's threat of invasion of Ukraine significantly escalated, it is still evaluated as a level that strongly pressures the economies of major countries.

Among European countries, inflation rates are high mainly in Eastern European countries adjacent to Russia, such as Poland (6.8%), Lithuania (6.7%), and Slovakia (6.4%). This is interpreted as inflation being driven by Russia's reduction in oil and gas supply and the fear psychology caused by concerns over the outbreak of war.

The EU Commission expects that the inflationary trend due to this geopolitical crisis will continue at least until the third quarter of this year. The inflation rate in the Eurozone is expected to reach 4.8% in the first quarter of this year and maintain high inflation above 3% until the third quarter. It is forecasted that inflation will return to below the 2% target set by the European Central Bank (ECB) only after the fourth quarter at the earliest.

Paolo Gentiloni, EU Commissioner for Economy, said, "Various headwinds such as the rapid spread of the COVID-19 Omicron variant, additional inflation increases due to soaring energy prices, and ongoing supply chain disruptions have made the European economy cold this winter," adding, "Inflation is expected to remain strong until summer, and thereafter prices will begin to fall as energy prices stabilize and supply chain issues are resolved."

However, the variable is the possibility of Russia's invasion of Ukraine. Commissioner Gentiloni emphasized, "Geopolitical tensions in Eastern Europe are significantly worsening the potential threats to the economy," and "Uncertainty and risks remain high."

As economic pressure due to these external factors intensifies, there are forecasts that the pace of the ECB's monetary policy tightening, which recently hinted at a tightening stance, may slow down. Earlier, on the 7th, Christine Lagarde, President of the ECB, attending the European Parliament, emphasized, "Any adjustment to monetary policy will be gradual," and "Interest rate hikes will not be implemented before the end of net asset purchases."

This content was produced with the assistance of AI translation services.