EU hikes Irish inflation forecasts as it lowers European growth outlook

European growth would flatline this year in event of outright cut in Russian gas, EU says

The European Commission has hiked its Irish inflation forecasts for this year and next as it lowered its growth outlook for the European Union as Russia's invasion of Ukraine has "posed new challenges", just as the union was recovering from the Covid-19 pandemic.

The commission said on Monday that it now expects inflation in Ireland to hit 6.1 per cent this year before easing to 3.1 per cent in 2023 – up from forecasts of 4.6 per cent and 2.5 per cent, respectively, that were issued in early February, before the war.

Conflict

Still, it has only shaved 0.1 percentage points off both its 2022 and 2023 Irish gross domestic product (GDP) forecasts, to 5.4 per cent and 4.4 per cent respectively, as the Republic’s economy remains more cushioned than other parts of the EU from the direct effects of the conflict.

GDP growth in both the EU and euro area is now expected to be 2.7 per cent this year, down from a previous projection of 4 per cent. The commission has also lowered its growth forecasts for the EU and euro zone marginally for next year, to 2.8 per cent and 2.7 per cent respectively.

However, the commission warned that European economic growth would fall close to zero this year in the event that Russian gas supplies were cut off abruptly as a result of the war. Such a scenario would also add 3 percentage points to its latest forecast that euro zone inflation is set to grow by 6.1 per cent in 2022 as a whole.

The EU was depending on Russia for about 40 per cent of its gas needs before the war began.

Meanwhile, an EU proposal to embargo oil from Russia under another round of planned sanctions is currently being vetoed by Hungary, which is highly dependent on Russian oil. The commission’s latest estimates do not factor in the impact of the proposal. However, it said that a substitution of Russian oil “would be manageable for the majority of member states”, even if it would push market prices higher.

Risks

“Uncertainty around the outlook has clearly increased and risks have tilted to the downside and are predominantly related to the duration of the war,” EU economic commissioner Paolo Gentiloni told a news conference.

Still, despite Government spending to cushion surging energy prices and support millions of refugees from Ukraine, the aggregate EU government deficit should fall in 2022 to 3.6 per cent of GDP from 4.7 per cent in 2021 as temporary Covid-19 support measures are withdrawn.

The commission sees the Irish Government turning in a budget surplus of 0.4 per cent of GDP next year, following a 0.5 per cent deficit for this year and a Covid-crisis peak of over 5 per cent in 2020.

“EU GDP is projected to remain in positive territory over the forecast horizon, thanks to the combined effect of post-lockdown re-openings and the strong policy action taken to support growth during the pandemic,” the commission said.

“Namely, the post-pandemic re-opening of contact-intensive services, a strong and still improving labour market, lower accumulation of savings and fiscal measures to offset rising energy prices are set to support private consumption.”

However, it said that the war in Ukraine has posed new challenges for Europe. "By exerting further upward pressures on commodity prices, causing renewed supply disruptions and increasing uncertainty, the war is exacerbating pre-existing headwinds to growth, which were previously expected to subside," it said.