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Energy prices will be “a more protracted drag” on the European Union’s (EU’s) economy this year, moving the European Commission (EC) to trim its 2022 growth forecast from 4.3 percent to an even 4.
The rate will slow further to 2.8 percent in 2023 and 2.7 percent in 2024, the EC predicted, as the EU’s economy recovers from the COVID-era shutdown and supply chains unclog.
Energy prices rose 26 percent year over year in December and will remain elevated at least until 2023, the EU said.
The EU’s inflation rate will peak at 3.9 percent this year and at 3.5 percent among the 19 countries that share the euro currency, the commission said, higher than previously forecast, before settling at 1.9 percent in the EU and 1.7 percent among the 19 Eurozone countries next year.
The forecasts heighten pressure on the European Central Bank to raise its interest rate from the -0.50 percent, where it has lain since 2014.
The bank has insisted that it will not raise rates this year, but a recent statement by bank president Christine Lagarde indicated the bank’s ruling committee might soften that stance, as we reported in “ECB About Face: Interest Rate Hikes” (8 Feb 2022).
After the COVID wave passes and supply lines clear, Europe will enter “a prolonged and robust expansionary phase” as consumers resume spending and labor markets strengthen, the EC’s statement said.
The EU’s GDP returned to its pre-COVID level last summer and is expected to surpass 2019’s output in all 27 member states before 2023, the EU said.
However, swelling energy prices will keep inflation above 3 percent across the region until at least the third quarter, the EU cautioned.
TREND FORECAST: Although Europe’s recovery lags those of the U.S. and China, reality will force the ECB to increase rates this year as energy prices continue to press inflation higher.
Because inflation is already curtailing consumer spending (see related article in this issue), any rate boost has a greater chance of derailing Europe’s economic recovery.
Therefore, the ECB’s initial rate hike, even if it is 50 basis points, will bring the rate to just zero! If that increase is tolerated and does not bring down the EU economy, the ECB will continue to raise rates a little at a time until Europe’s economy shows signs of going into reverse.