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Inflation at 6.8%, slow growth: Brussels’ dark scenario for the European economy

Inflation at 6.8%, slow growth: Brussels’ dark scenario for the European economy
Written by madishthestylebar

The shock wave of the war in Ukraine is spreading at full speed throughout the Old Continent. After the outbreak of the conflict at the end of February, the economic indicators continued to deteriorate one after the other. After the IMF and the OECD, the European Commission has significantly revised down its European growth forecasts for 2022 unveiled on Monday May 16, from 4% to 2.7%. Regarding 2023, Brussels also downgraded its GDP growth figure from 2.7% to 2.3%.

After a vertiginous plunge in 2020 at the peak of the pandemic at -5.9%, the European economy had rebounded well in 2021 at 5.4% before returning again to a zone of severe turbulence. Between galloping inflation, soaring prices on the energy and commodity markets, the rise in interest rates announced by the European Central Bank (ECB) a few days ago, the economic horizon has considerably darkened since winter.

To counter inflation, Christine Lagarde (ECB) triggers a rate hike

Big hit to growth in Germany

The war in Ukraine has put a serious brake on the German economy. European Commission statisticians have downgraded their German GDP growth projections by two points to 1.6% in 2022 from 3.6% on February 10. It must be said that the economy across the Rhine is highly dependent on Russian energy to run its industry.

In addition, supply difficulties continue to weigh on the automotive industry, a heavyweight in the German economic model. As a result, Germany, the largest economy in the euro zone, should cease to be the economic engine of Europe this year given the accumulation of its setbacks since the start of the pandemic. Some observers now do not hesitate to speak of the “sick man” of Europe. For the “traffic light” coalition led by Olaf Scholz (SPD), this slowed growth could weaken post-Merkel Germany.

Danger on Germany’s trade balance: exports fall, imports soar

French growth should also slow down in 2022

The engines of the French economy are also settling. After a strong rebound of around 7% in 2021, GDP growth should slow to 3% in 2022 and 1.8% in 2023. Last February, Brussels forecast growth of 3.6% this year and 2.1% in 2023. In France, most forecasting institutes have also downgraded their growth figures. In the first quarter, the tricolor economy stood still before recovering slightly during the second quarter (0.2%) according to forecasters from the Banque de France and those from INSEE. Consumption, France’s traditional strong point, has slowed since the start of the year under the effect of soaring prices and falling household and business confidence

Despite all the government’s measures to try to stem the inflationary spiral (tariff shield, rebate of 18 euro cents on gasoline), the French are anticipating the drop in purchasing power announced by INSEE for the first half of the year. . The new government, which is to be announced in the hours to come, will have the difficult task of presenting a new amending budget after the legislative elections, with “a purchasing power package”, intended to limit the macroeconomic impact of this war if it does not don’t want to find themselves facing social anger quickly. Indeed, the wage increases resulting from negotiations in companies since the beginning of the year are very far from offsetting the rise in the price index of around 5%, as a Banque de France study revealed very clearly last week. As a result, real incomes for many French employees are likely to drop drastically.

Inflation of 5%, almost zero growth…, INSEE’s gloomy forecasts for the French economy

Massive blow to the Italian economy, Spain in decline

Among the other major powers in the euro zone, the Italian economy is in very bad shape. The European Commission projects GDP growth of 2.4% in 2021 and 1.9% in 2023. Last February, the Brussels institution anticipated an acceleration in GDP of 4.1% and 2.3% in 2023. A succession of crises in recent years has left deep marks on the productive fabric of the peninsula, which is highly dependent on its foreign trade. Despite a relatively substantial recovery plan, the Italian government should be struggling to resolve the two major weak points of the economy in southern Europe: sluggish growth and sluggish productivity.

As for Spain, it should limit the damage. The European Commission forecasts activity growth of 4% in 2022 and 3.4% in 2023. On 10 February, European statisticians anticipated an acceleration of 5.6% in 2022 and 4.4% in 2023. Heavily affected by the pandemic, tourism, a pillar of the Spanish economic model, has recovered in recent months. The slowdown in the European economy and the prolongation of the war could however limit destination plans this summer for many tourists.

Inflation at 6.8% in 2022

The terrible conflict in Ukraine has considerably accelerated the rise in prices on the Old Continent. Between soaring gas and oil prices, the surge in agricultural raw materials and the shortage of certain materials, inflation calculated by the European Commission could rise to 6.8% in 2022 before falling back to 3.2% next year. Before the war, the European Commission was counting on inflation at 3.9% in 2022 in the EU of 27 (3.5% in the euro zone) before falling to 1.7% in 2023. adds the zero covid policy implemented in China which contributes to heating up the prices of sea and air freight or even the price of certain electronic components.

As a result, the European Central Bank has already begun to tighten its monetary policy by announcing the end of its emergency asset purchase program (PEPP) set up in the midst of a pandemic and a rise in its rates during next summer. The equation for its president Christine Lagarde should be particularly perilous. Indeed, a tightening of monetary policy could have disastrous repercussions on European activity barely out of the long tunnel of the health crisis.