(CN) — Just three months ago, the European Union’s economic forecast projected hope for post-pandemic production and spending. The organization's spring forecast, published Monday, cautiously assessed risks associated with high energy prices and supply chain disruptions largely driven by Russia's war on Ukraine.
"Just as our economy was shaking from the pandemic shock, Russia's war on Ukraine has brought extraordinary economic uncertainty back to Europe,” said Paolo Gentiloni, the EU's economic commissioner, in a video statement. “The war has triggered renewed upward pressures on commodity prices, has aggravated supply chain disruptions, and dampened consumer and business confidence. All of these factors exasperate preexisting headwinds to economic expansions.”
After hitting an inflationary ceiling of 7.5%, the EU anticipates rates gradually decreasing through the year, averaging out to 6.8%. By 2023, the EU projects inflation will drop to a three-year low of 3.2%.
While the EU initially looked to track continued post-pandemic economic growth marked by 4% GDP, the organization has tamped its projection down to 2.7% growth over the rest of 2022, followed by slight decreases next year.
“The overwhelming negative factor is the surge in energy prices, driving inflation to record highs and putting a strain on European businesses and households,” said EU trade commissioner Valdis Dombrovskis in a statement. “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 EU imports more than a quarter of its crude oil from Russia, along with 46% of solid fuel and 40% of natural gas.
Russia cut off natural gas exports to Poland and Bulgaria in April, further exacerbating costs of energy for the EU, which has backed Ukraine in the conflict.
To make up shortages, the EU is looking to source liquefied natural gas imports from the U.S. and increase imports from North Africa and the Middle East. Still, experts say it will be very difficult to fully replace Russian energy any time soon.
While EU member states set a goal of cutting demand for imported Russian fossil fuel by two-thirds within the year, this move is likely to further drive up short-term costs.
Energy only makes up about 10% of EU household spending, with about 40% going to services and 20% to food, alcohol and tobacco. While energy consumption decreased across the EU in 2020, rising prices are likely to offset any reported savings.
In addition, the war makes it challenging to continue production and export of grains, oil seeds, fertilizer and other agricultural goods the EU relies on from Ukraine and Russia, as well as industrial metals and neon gas, used in the production of semiconductors.
The report assumes the war will continue through the next quarter and current Russian sanctions will remain in place.
Meanwhile, the EU anticipates seeing 6 million Ukrainian refugees by the end of 2022, many of whom may remain through 2023. While the economists expect Ukrainian refugees to gradually enter the workforce, the impact isn’t likely to become apparent until next year.
Unemployment continues to decrease toward record lows after 5.2 million jobs were added to the EU economy in 2021, resulting in 3.5 million new hires. Over the next year, unemployment is expected to drop to 6.7%.
While the pandemic economy was characterized by a temporary but deep contraction on economic activity that drove down inflation, Russia's invasion of Ukraine is unleashing renewed supply chain shocks and driving up inflation with trends that are likely to continue through the duration of the conflict.
The report also noted Covid-19 remains a risk factor, particularly with absenteeism driven by China’s “dynamic Zero-Covid” policy.
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