Europe will enter recession at the end of the year and suffer higher than expected inflation due to soaring energy prices linked to the war in Ukraine, Brussels warned on Friday.
“We have difficult months ahead of us,” admitted the European Commissioner for the Economy, Paolo Gentiloni, during a press conference.
He predicted a contraction in activity in the last quarter of this year and the first of 2023, and therefore a “recession” for both the EU, the euro zone and “most member states”.
As a result, next year’s GDP growth has been revised down sharply, to just 0.3% for countries sharing the single currency, against 1.4% expected so far, although a return to growth is expected in the spring.
Europe is particularly affected by the consequences of the Russian invasion of Ukraine. It “is among the most affected advanced economies, due to its geographical proximity to the war zone and its heavy dependence on gas imports from Russia,” the Commission said in a statement.
The recovery recorded since last year, after the historic recession of 2020, resisted until this summer even if it slowed down. The euro zone still recorded 0.2% growth in the third quarter, surprising analysts. Enough to raise the forecast for 2022 by 0.5 points to 3.2%.
“Clash of War”
“But the shock of the war is taking over,” said Mr. Gentiloni. Inflation continues to exceed our forecasts, the sharp erosion of purchasing power has caused a drop in consumer confidence, such as that of companies which are facing high production costs, persistent supply difficulties and tightening conditions funding”.
Brussels has revised its inflation forecast for the euro zone for 2023 sharply upwards, to 6.1%, against the anticipated increase of 4% so far. However, it expects the rise in prices to start to recede after an expected high point at the end of 2022.
Over the whole of 2022, Brussels is now expecting inflation to be stronger than expected at 8.5%, against 7.6% previously.
“Uncertainty remains exceptionally high” due to the war and could lead to even worse figures, however warned Paolo Gentiloni.
Gas stocks appear sufficient for the moment, but the almost total halt in Russian deliveries and the difficulty of compensating for this lack with imports from other countries will make it more difficult to replenish stocks for the winter of 2023/2024, a he estimated.
If Europe fails to prepare properly, the economic damage could be far greater than expected, he admitted. In a pessimistic scenario, GDP could thus fall by 0.9% in 2023 and inflation prove to be much more persistent.
“Risk of deindustrialization”
Companies are alarmed by energy prices that are much higher in Europe than in the United States or Asia. Factories and investment projects threaten to desert the EU, raising fears of an economic stall.
“This risk of deindustrialization exists,” acknowledged Mr. Gentiloni. “But it does not lead me to catastrophic predictions, because the choice of industrial locations depends on many factors, not just energy prices,” he qualified.
He insisted on the need for the 27 member countries of the EU to remain united. “If, as Europeans, we are able to stay united, we can successfully overcome this difficult period and come out of it stronger.”
Germany, the largest European economy, is expected to record the weakest performance of EU countries next year, with a decline of 0.6% in its GDP, compared to growth of 0.4% in France, of 1 % in Spain and 0.3% in Italy.
In 2023, inflation is expected to be lowest in Denmark (3.7%). It would be in Germany clearly above the average (7.5%) and almost twice as high as in France (4.4%), according to forecasts from Brussels.
On the positive note, the European labor market should remain strong. The unemployment rate, which is at a historic low, is expected to increase “only marginally”, rising from 6.8% this year to 7.2% in 2023 in the euro zone.