TOP TREND 2022, DRAGFLATION: EC ADJUSTS FORECASTS

Inflation across the Eurozone will reach 7.6 percent this year, the European Commission (EC) said, adjusting its forecast of 6.1 percent issued this spring.

Prices will inflate by 4 percent in 2023, the EC predicted, twice the European Central Bank’s 2-percent target rate. The EC had forecast 2.7 percent in its spring outlook.

In Estonia and Lithuania, inflation will zoom to 17 percent this year, with the Czech Republic, Hungary, Poland, and Romania also facing double-digit price hikes, the forecast said.

Meanwhile, the Eurozone’s GDP will grow 2.6 percent this year and 1.4 percent in 2023, the commission said.  

European economies have gained some momentum as COVID-era lockdowns have been lifted, but growth will lack that engine next year and will weaken as a result, Paolo Gentiloni, EC economics commissioner, said in a statement accompanying the revised forecasts.

The new outlook lands as the European Central Bank readies its first interest rate increase since 2014. It has signaled it will raise its key rate from -0.50 percent to -0.25 percent, a development we reported in “ECB Announces Rate-Hike Plan” (14 Jun 2022).

Those new predictions might not last if Russia’s war in Ukraine endures or, especially, if Russia does not reopen the Nord Stream 1 pipeline, which provides Europe with a third or more of its natural gas.

Russia shut off the pipeline earlier this month for what it called “routine maintenance.” (See “New World Disorder Top Trend: Germany Rations Power as Russia Cuts Gas Supplies,” 12 Jul 2022.)

“Russia’s war against Ukraine continues to cast a long shadow over Europe and our economy,” EC vice-president Valdis Dombrovskis said in a Financial Times interview.

“We are facing challenges on multiple fronts, from rising energy and food prices to a highly uncertain global outlook,” he warned.

“Stagflationary forces [are] currently in play,” the EC said, and warned of possible “adverse outcomes” to the region’s economy because of the Ukraine war and Europe’s dependence on Russian fuel supplies.

TREND FORECAST: Barring an unexpected event, such as an abrupt halt to the Ukraine war, Europe will continue its economic slide through stagflation into our Top 2022 Trend of Dragflation: rising costs and lower economic output.

Especially as Europe tries and fails to fill its natural gas storage tanks against this winter’s heating season, energy prices will creep up and businesses and consumers will cut their economic activity as fuel bills take a greater share of their incomes.