EU expects recession and ‘difficult months’ this winter

Europe will enter recession at the end of the year and suffer higher than expected inflation due to soaring energy prices linked to the war in Ukraine, Brussels warned on Friday. “We have difficult months ahead of us,” admitted the European Commissioner for the Economy, Paolo Gentiloni, during a press conference. He predicted a contraction in activity in the last quarter of this year and the first of 2023, and therefore a “recession” for both the EU, the euro zone and “most member states”.

As a result, next year’s GDP growth has been revised down sharply, to just 0.3% for countries sharing the single currency, against 1.4% expected so far, although a return to growth is expected in the spring. Europe is particularly affected by the consequences of the Russian invasion of Ukraine. It “is among the most affected advanced economies, due to its geographical proximity to the war zone and its heavy dependence on gas imports from Russia,” the Commission said in a statement.

The recovery recorded since last year, after the historic recession of 2020, resisted until this summer even if it slowed down. The euro zone still recorded 0.2% growth in the third quarter, surprising analysts. Enough to raise the forecast for 2022 by 0.5 points to 3.2%.

“Clash of War”

“But the shock of war is taking over,” Gentiloni said. Inflation continues to exceed our forecasts, the sharp erosion of purchasing power has caused a drop in consumer confidence, such as that of companies which are facing high production costs, persistent supply difficulties and tightening conditions funding”. Brussels has revised its inflation forecast in the euro zone for 2023 sharply upwards, to 6.1%, against only 4% expected so far. However, it expects the rise in prices to start to recede after an expected high point at the end of 2022.

Over the whole of 2022, Brussels is now expecting inflation to be stronger than expected at 8.5%, against 7.6% previously. “Uncertainty remains exceptionally high” due to the war and could lead to even worse figures, however warned Paolo Gentiloni.

Gas stocks appear sufficient for the moment, but the almost total halt in Russian deliveries and the difficulty of compensating for this lack with imports from other countries will make it more difficult to replenish stocks for the winter of 2023/2024, a he estimated. If Europe fails to prepare properly, the economic damage could be far greater than expected, he admitted. In a pessimistic scenario, GDP could thus fall by 0.9% in 2023 and inflation prove to be much more persistent.