Europe will enter a recession at the end of the year and suffer from higher than expected inflation due to soaring energy prices linked to the war in Ukraine. This is what the European Union said 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 sharply downwards, to just 0.3% for countries sharing the single currency, against 1.4% expected so far, even if a return to growth is expected in the spring.
The war in Ukraine, a major factor in the economic slowdown
Europe is particularly affected by the consequences of the Russian invasion of Ukraine. It “is one of 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.
Brussels has revised its inflation forecast in the euro zone for 2023 sharply upwards, to 6.1%, against only 4% expected so far. However, it expects price increases to begin to decline after a high point expected at the end of 2022. For 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.
Varying situations within the European Union
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.
Germany, Europe’s largest economy, should record the weakest performance of EU countries next year, with a decline of 0.6% in its GDP, against 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”, from 6.8% this year to 7.2% in 2023 in the euro zone.