Ukraine war to slash euro zone 2022 growth, boost inflation, European Commission says

EU flags fly outside the European Commission headquarters in Brussels
European Union flags fly outside the European Commission headquarters in Brussels, Belgium, March 6, 2019. REUTERS/Yves Herman/File Photo

BRUSSELS, May 16 (Reuters) - Russia's invasion of Ukraine and the resulting surge in energy and commodity prices will slash euro zone economic growth this year and next, while boosting inflation to record levels, the European Commission forecast on Monday.

The Commission cut its growth forecast for the 19 countries sharing the euro to 2.7% this year from 4.0% predicted only in February, shortly before the war in Ukraine started. Growth will then slow to 2.3% next year, also below the 2.7% seen before.

The forecast is the first comprehensive estimate of the economic cost of the conflict in its neighbour for the euro zone and the wider 27-nation EU.

"The outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion. But Russia's invasion of Ukraine has posed new challenges, just as the Union had recovered from the economic impacts of the pandemic," the Commission said in a statement.

"By exerting further upward pressures on commodity prices, causing renewed supply disruptions and increasing uncertainty, the war is exacerbating pre-existing headwinds to growth, which were previously expected to subside."


Moscow calls its invasion a "special military operation" to rid Ukraine of fascists, an assertion Kyiv and its Western allies say is a baseless pretext for an unprovoked war.

The Commission said the European economy would be hit even more severely if Russia were to cut off gas supplies to the EU, estimating such a development would reduce the projected growth by 2.5 percentage points in 2022 and 1 percentage point in 2023. That would set off a recession, it said.

Inflation, which the European Central Bank wants to keep at 2.0% will be 6.1% this year, the Commission forecast, falling to 2.7% - still well above the ECB's target - next year. Before the war, the Commission expected prices to grow 3.5% in 2022 and 1.7% in 2023.

The scenario of an abrupt cut-off by Russia of gas supplies would boost inflation by an additional 3 percentage points in 2022 and an extra 1 percentage point in 2023, the Commission said.

"Uncertainty around the outlook has clearly increased and risks have tilted to the downside and are predominantly related to the duration of the war," EU Economic Commissioner Paolo Gentiloni told a news conference.

Despite government spending to cushion surging energy prices and support millions of refugees from Ukraine, the aggregate EU government deficit should fall in 2022 to 3.6% of GDP from 4.7% in 2021 as temporary COVID-19 support measures are withdrawn. It should fall to 2.5% in 2023, the Commission said.

In the euro zone, the aggregate deficit is to halve to 3.7% this year against 2021 and fall further to 2.5% next year while aggregated euro zone public debt is to fall to 94.7% of GDP from 97.4% in 2021 and ease further to 92.7% in 2023.

Also, despite the slower growth, euro zone unemployment is to fall further to 7.3% of the workforce this year and to 7.0% in 2023 from 7.7% in 2021.

Reporting by Jan Strupczewski; Editing by Toby Chopra and Catherine Evans

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Jan is the Acting Bureau Chief in Brussels. He has been covering European Union policy, focusing on economics, since 2005 after a five year assignment in Stockholm where he covered tech and telecoms stocks, the central bank and general news. Jan joined Reuters in 1993 in Warsaw from the main Polish TV news programme "Wiadomosci", where he was a reporter and anchor for the morning news edition. Jan won the Reuters Journalist of the Year award in 2007 in the Scoop of the Year category, a second time in 2010 for his coverage of the euro zone sovereign debt crisis and for the third time in 2011, this time as part of the Brussels team, for the Story of the Year. A Polish national, Jan graduated from Warsaw University with a Master’s in English literature. He is a keen sailor, photographer and bushcraft enthusiast. Contact: +32478340050