EU warns of ‘difficult months’ as eurozone faces recession

EU warns of ‘difficult months’ as eurozone faces recession

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The EU warned on Friday that the euro zone could slip into recession this winter as Brussels raised inflation forecasts for 2022 and 2023 on the back of high energy prices.

Europe is suffering from the economic shockwaves unleashed by Russia’s war in Ukraine, which have pushed up energy costs and hit the wallets of consumers across the continent.

The EU executive said rising uncertainty and prices are “likely to plunge the eurozone and most bloc member states into recession” in the final quarter of this year.

“The decline in economic activity is expected to continue in the first quarter of 2023. Growth is expected to return to Europe in the spring,” the European Commission said.

“With strong headwinds still holding back demand, economic activity is expected to be subdued, with GDP growth set to hit 0.3 percent in 2023.”

Brussels predicted that the EU’s largest economy, Germany, would fare worst among member states next year with a contraction of 0.6 percent.

Total Eurozone GDP growth for 2022 was estimated at 3.2 percent after strong early months of the year.

But EU Economy Commissioner Paolo Gentiloni said “the effects of rising energy prices and rampant inflation are now taking their toll”.

“We have a difficult few months ahead of us,” said Gentiloni.

He warned that “the potential for further economic disruption from the war in Russia is far from exhausted.”

– Inflation peak in sight? –

The bleak forecast came as the commission sharply upgraded its forecasts for inflation this year and next.

It said euro-zone inflation is expected to be 8.5 percent in 2022, one point higher than previously forecast, and 6.1 percent in 2023, more than two points higher than previously forecast.

“Inflation has continued to rise faster than expected, but we believe the peak is near. Most likely by the end of this year,” Gentiloni said.

“We expect inflation to come down very gradually because inflation will still be quite high next year.”

However, he warned that inflation could be two points higher in 2023 if the EU does not prepare sufficiently in advance for next winter by replenishing its gas stocks.

The baseline forecast put inflation at 2.6 percent in 2024, still higher than the European Central Bank’s (ECB) target of two percent.

The ECB predicted an impending recession in October when it announced another jumbo interest rate hike to try to stem inflation, which was being fueled by the aftermath of Russia’s war with Ukraine.

Bank President Christine Lagarde said last week that a “mild” recession in the euro zone was imminent but would not be enough to bring down record high inflation.

Gentiloni said one “bright spot” remained the resilience of the EU labor market and that only a “moderate” rise in unemployment was expected before a fall in 2024.

The aggregate government budget deficit is expected to widen from 3.4 percent in 2022 to 3.6 percent in 2023 as the EU debates reforming its fiscal rules.

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