Russia's invasion of Ukraine and the 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 growth forecast for the 19 countries sharing the euro fell to 2.7% this year from 4.0% predicted in February, shortly before the war in Ukraine began. Growth is expected to slow to 2.3% next year, which is lower than the 2.7% seen before.
The forecast is for the first comprehensive estimate of the economic cost of the war in Ukraine for the 19 countries sharing the euro and the wider 27 nation EU.
The outlook for the EU economy was for a long and robust expansion before the outbreak of the war. The EU had recovered from the economic impacts of the Pandemic and Russia's invasion of Ukraine has posed new challenges, the Commission said in a statement.
The war is exacerbating pre-existing headwinds to growth, which were previously expected to subside by exerting more upward pressures on commodity prices, causing renewed supply disruptions and increasing uncertainty, which were previously expected to subside, it said.
Inflation, which the European Central Bank wants to keep at 2.0%, will be 6.1% this year, the Commission forecasts, and will fall only to 2.7% next year. Before the war, the Commission expected prices to grow by 3.5% in 2022 and 1.7% in 2023.
The EU's government deficit should fall to 3.6% of GDP in 2022 from 4.7% in 2021 due to temporary COVID 19 support measures being withdrawn, despite government spending to cushion surging energy prices and support millions of refugees from Ukraine. The Commission said it should fall to 2.5% in 2023.
In the euro zone, the aggregate deficit is expected to fall to 3.7% this year against 2021, and fall to 2.5% next year, while the euro zone's public debt is expected to fall to 94.7% of GDP from 97.4% in 2021 and to 92.7% in 2023.
Despite the slower growth, the euro zone's unemployment will fall to 7.3% of the workforce this year and 7.0% in 2023 from 7.7% in 2021.