EU growth outlook revised down after Ukraine invasion

After Russia invaded Ukraine, the growth prospects of the EU have been revised sharply downwards as a result of the hope of a strong and sustained recovery from Covid 19 over the next two years.

The European Commission said in its latest forecasts that the conflict has pushed up inflation and increased economic headwinds during a period when they were expected to subside.

The commission now expects to see growth of 2.7% in the euro area and the broader 27 country EU in 2022, down from a forecast of 4% three months ago.

A complete cut in supplies of Russian gas would shave a further 2.5 points off growth, bringing the economy to a virtual standstill this year, it said.

Growth in the EU and the euro area is expected to slow down next year, with many European countries heavily dependent on Russian energy exports.

Inflation, already at its highest level since the creation of the single currency more than two decades ago, is expected to average 6.1% this year, up from 3.5% in the last set of commission predictions in February. The EU's inflation is expected to be around 6.8%. The commission said that inflation would average close to 10% in the event of a Russian gas ban.

The outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion. Russia's invasion of Ukraine has created new challenges, just as the Uunion had recovered from the economic impacts of the epidemic, it said in a statement.

The EU's fastest growing countries are expected to be Portugal, at 5.8% and Ireland 5.4% with Estonia 1% and Finland both 1.6% predicted to be the weakest.

According to Valdis Dombrovskis, EU trade commissioner, there is no doubt that the EU economy is going through a difficult period due to Russia's war against Ukraine, and we have downgraded our forecast accordingly.

The surge in energy prices has made inflation record highs and put a strain on European businesses and households, as a result of the overwhelming negative factor. Growth will continue this year and next, but it will be much more subdued than previously expected. As long as Russia continues to aggression, there will be a high level of uncertainty and risks to the outlook. News of the gloomier outlook for the EU came in after signs of a slowing of the world's second biggest economy, China.

Analysts had predicted a decline in retail sales of 6% in April due to a lock down and falling consumer confidence but official figures showed that the fall was almost twice as big as just over 11%.

The closing of factories led to a 2.9% fall in industrial production in April, the biggest fall since the early months of the Pandemic in 2020. The unemployment rate, a closely watched indicator by the Chinese authorities, rose from 5.8% to 6.1%.

Iris Pang, an analyst at ING, said she expected China's gross domestic product to be a measure of its growth rate to be 1% lower in the second quarter of 2022 than a year earlier.

The long lockdown in Shanghai is the main reason, Pang said. The factories that don't have dormitories for workers struggle to operate because of this, which hurt retail sales the most.