EU cuts forecast for economic growth as war’s fallout widens

The European Union has slashed its forecasts for economic growth in the 27-nation bloc amid the prospect of a drawn-out Russian war in Ukraine and disruptions to energy supplies.

The EU’s gross domestic product will expand 2.7% this year and 2.3% in 2023, the bloc’s executive arm said Monday — its first economic predictions since Russia invaded Ukraine on Feb. 24.

The European Commission’s previous outlook expected growth of 4% this year and 2.8% in 2023. The EU economy expanded 5.4% last year following a deep recession prompted by the Covid-19 pandemic. GDP shrank 5.9% in 2020.

“Russia’s invasion of Ukraine has posed new challenges, just as the union had recovered from the economic impacts of the pandemic,” the commission said when releasing the forecast. “The war is exacerbating pre-existing headwinds to growth.”

The war has darkened what was generally a bright economic picture for the EU. Early this year, European policymakers were counting on solid, if weaker, growth while grappling with surging inflation triggered by a global energy squeeze.

Now, energy has become a key problem for the EU as it seeks sanctions that deny Russia tens of billions in trade revenue without plunging member countries into recession. Soaring energy prices are driving record inflation, making everything from food to transport and housing more expensive.

Russia is the EU’s top supplier of oil, natural gas and coal, accounting for around a quarter of the bloc’s total energy. EU imports of energy from Russia last year totaled 99 billion euros ($103 billion), or 62% of the bloc’s purchases of Russian goods.

An EU ban on coal from Russia is due to start in August, and a voluntary effort is underway to reduce demand for Russian natural gas by two-thirds this year. A proposed oil embargo has hit roadblocks amid reservations from some landlocked countries that are highly dependent on Russian oil, such as Hungary.

All of this has left the EU scrambling to secure alternative supplies of energy in the coming months, including from fossil-fuel exporting countries such as the United States and from domestic renewable sources meant to help the bloc achieve its longer-term climate goals.

“Russia’s invasion of Ukraine is leading to an economic decoupling of the EU from Russia, with consequences that are difficult to fully apprehend at this stage,” the European Commission said.

The latest forecast also paints a gloomier inflation picture as a result of the increases in energy prices. EU-wide inflation is now expected to be 6.8% this year and 3.2% in 2023 — well above the previous projections of 3.9% and 1.9%, respectively.

European Economy Commissioner Paolo Gentiloni warned that even the new economic outlook could be too optimistic in view of the war.

“Our forecast is subject to very high uncertainty and risks,” Gentiloni said. “Other scenarios are possible under which growth may be lower and inflation higher than we are projecting.”

In the months before the invasion, a worldwide energy crunch had driven inflation in Europe to record highs. That trend has accelerated during the conflict, with inflation in the 19 countries that share the euro currency hitting 7.5% in April.

This has set the stage for the European Central Bank to possibly bring to an end to years of loose monetary policy in coming months — including record-low interest rates — meant to help fuel economic activity.

The bank, which has an inflation target of 2%, has maintained its interest rates at zero or less and kept other market borrowing costs low by purchasing hundreds of billions of euros of assets in financial markets.

Bank officials have signaled a reversal in both policies starting as soon as this summer but are balancing how to target inflation without weighing on economic growth. The central banks of the U.S. and the United Kingdom have raised interest rates this year to counter galloping inflation.

Gentiloni on Monday would not rule out the possibility of the EU falling into stagflation — the combination of a stagnant economy and rising inflation — while saying such a risk remained remote.

“This is possible if the negative scenario materializes, but this is not our base forecast,” Gentiloni said. “But indeed we have very high inflation and quite low growth.”