The war in Ukraine and the lockdowns in China are slowing growth in the European Union and fueling a strong surge in prices. Just a few months ago, economists were fearing a new wave of Covid-19. But it was the war in Ukraine, which started on 24 February, that turned their forecasts upside down.
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The public deficit is expected to be 3.6% of GDP in the European Union in 2022, and 2.5% in 2023!!!
On Monday, May 16, the European Commission presented its new projections, which outline a much less optimistic scenario. From now on, it is expecting an increase in gross domestic product (GDP) of 2.7% in 2022 and 2.3% in 2023 in the European Union (EU) as well as the euro zone. In February, in its latest forecast, it had anticipated growth of 4% in 2022 and 2.8% (2.7% for the eurozone) the following year.
The EU-27 continue to reap the benefits of the post-Covid recovery and the 750-billion-eruo European recovery plan. But the situation has changed dramatically compared to the winter of 2021. On November 11, Paolo Gentiloni, the commissioner for economic affairs, described the expected situation for the European economy as "extraordinary," adding that such a situation "will not happen again soon, perhaps never for [his] generation" and urging the Union's member states to take advantage of it to reform. Russia's aggression, beyond the havoc it is wreaking in Ukraine, has dashed his hopes.
In addition, the lockdowns in China, particularly in Shanghai, are aggravating the difficulties for supplying industry, and slowing world trade. For Germany, which had important economic ties with Russia, it is a double whammy. The country is expected to experience growth of 1.6% in 2022 and 2.4% in 2023. France, whose activity depends less on trade with the outside world and more on domestic consumption, fares better in the short term (3.1% in 2022), but not beyond (1.8% in 2023).
Job market expected to withstand headwinds
While energy prices had already surged with the post-pandemic recovery, the war has pushed them to a new level and the resulting inflationary surge is expected to last longer than expected. The conflict in Ukraine has increased the supply disruptions that European industry was already suffering from before February 24, and has put pressure on agri-food markets. In this context, the Commission now expects eurozone prices to rise by 6.1% (6.8% in the whole EU) in 2022 – with a peak of 6.9% in the second quarter – and 2.7% in 2023 (3.2% in the whole EU).
The labor market, meanwhile, should weather these ill winds and benefit from the end of Covid-19 and the reopening of restaurants, cinemas and other businesses. The unemployment rate should fall further, the Commission predicts, to 6.7% in 2022 (7.3% in the eurozone) and 6.5% in 2023 (7% in the eurozone). Similarly, European public finances should continue to reap the benefits of the end of the aid measures deployed by the Twenty-Seven when Covid-19 had brought their economies to a standstill. The public deficit should represent 3.6% of GDP in the EU in 2022, and 2.5% in 2023 (3.7% and 2.5% in the eurozone). As for the debt-to-GDP ratio, it is expected to fall from 90% in 2021 to 87% in 2022 and 85% in 2023 (95% and 93% in the euro area).
