Europe’s growth forecast cut as energy crisis drives up inflation
The European Commission has cut its forecast for European growth this year, and hiked its inflation forecast, as the Ukraine war hits the economy.
In its latest Spring forecasts, the EC predicts real GDP growth in both the EU and the euro area of 2.7% in 2022, down from 4% forecast three months ago.
Growth is expected to slow to 2.3% in 2023, down from a previous forecast of 2.8% in the EU (and 2.7% in the euro area).
And with energy prices having soared this year, inflation is expected to average 6.1% in 2022, and peak at 6.9% in the current quarter (it hit 7.5% in April, the highest rate in the history of the monetary union).
That’s a “considerable upward revision compared to the Winter 2022 interim Forecast” of 3.5% inflation, the Commission says. Inflation is then seen falling to 2.7% in 2023, still over the European Central Bank’s 2% target.
The Commission says:
The outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion. But Russia’s invasion of Ukraine has posed new challenges, just as the Union had recovered from the economic impacts of the pandemic.
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.
The report highlights that the Ukraine war has added to pre-existing headwinds facing the economy.
It has led to rising energy commodity prices, supply chain disruption and more expensive food and other basic goods and services.
The report says:
The main hit to the global and EU economies comes through energy commodity prices. Although they had already increased substantially before the war, from the low levels recorded during the pandemic, uncertainty about supply chains has pressured prices upwards, while increasing their volatility.
This is true for food and other basic goods and services, with households’ purchasing power declining.
UK diesel prices have hit record high
UK diesel prices have hit record highs, pushing up the costs faced by some firms and motorists.
The RAC reports that the average price of a litre of diesel has hit a new record high at 180.29p.
Petrol prices are also close to March’s record levels, as the cost of living squeeze continues to put pressure on households and businesses.
RAC fuel spokesperson Simon Williams said:
Efforts to move away from importing Russian diesel have led to a tightening of supply and pushed up the price retailers pay for diesel.
While the wholesale price has eased in the last few days this is likely to be temporary, especially if the EU agrees to ban imports of Russian oil.
Williams adds that the 5p per litre cut in fuel duty in March’s Spring Statement has had little impact:
“Unfortunately, drivers with diesel vehicles need to brace themselves for yet more pain at the pumps. Had Mr Sunak reduced VAT to 15% as we call on him to do instead of cutting duty by 5p, drivers of diesel vehicles would be around 2p a litre better off, or £1 for every full tank. As it is, drivers are still paying 27p VAT on petrol and 29p on diesel, which is just the same as before the Spring Statement.
“The average price of petrol is also on the rise having gone up nearly 3p a litre since the start of the month to 166.65p which means it’s less than a penny away from the all-time high of 167.30p set on 22 March.”
Here are next year’s growth forecast for the EU:
Energy crunch pushes eurozone trade gap to record high
The surge in energy costs has dragged the eurozone into a record trade deficit with the rest of the world.
The euro area recorded a €16.4bn deficit in trade in goods with the rest of the world in March 2022, compared with a surplus of €22.5bn in the same month a year ago, the latest trade data shows.
Adjusted for seasonal swings, the eurozone trade gap was even bigger at €17.6bn.
The wider EU recorded a €27.7bn deficit in trade in goods in March.
In January-March, the EU ran up an €81.5bn deficit in trade in goods, compared with a €48.5bn surplus a year earlier.
That’s mainly due to the surge in wholesale energy costs, which has pushed up the cost of Europe’s energy imports by 138% in the first quarter of the year (from €69.1bn to €164.7bn).
As a result, the EU’s deficit in energy trade almost tripled to €128.7bn in Q1.
A fair chunk of that money will have gone to Moscow. The EU’s trade deficit with Russia has more than quadrupled in January-March, to €45.2bn from €10.8bn in Q1 2021.
Portugal is expected to record the fastest growth in the EU this year, at 5.8%, followed by Ireland with 5.4%.
The weakest growth is seen in Estonia, with just 1%, followed by Germany and Finland with 1.6% each.
The UK, incidentally, is expected to grow by 3.4% this year, faster than the eurozone and EU average of 2.7%.
However. UK growth is seen slowing to 1.6% in 2023, slower than the European average of 2.3% — but better than the small contraction forecast by the Bank of England.
Here are the key charts from the EC’s new forecasts:
Paolo Gentiloni, Commissioner for Economy, warns that Europe’s growth could be even lower, and inflation even higher, depending how the Ukraine war develops.
“Russia’s invasion of Ukraine is causing untold suffering and destruction, but is also weighing on Europe’s economic recovery. The war has led to a surge in energy prices and further disrupted supply chains, so that inflation is now set to remain higher for longer.
Last year’s strong economic rebound will have a lingering positive effect on growth rates this year. A strong labour market, post-pandemic reopening and NextGenerationEU should provide further support to our economies and help to drive public debt and deficits lower.
This forecast is however subject to high uncertainty and risks that are closely linked to the development of Russia’s war. Other scenarios are possible under which growth may be lower and inflation higher than we are projecting today.”
Europe’s growth will be “much more subdued” than previously expected, due to the Ukraine war, says Valdis Dombrovskis, executive vice-president for an Economy that Works for People.
Explaining today’s growth downgrades, Dombrovskis says:
“There is no doubt that the EU economy is going through a challenging period due to Russia’s war against Ukraine, and we have downgraded our forecast accordingly.
The overwhelming negative factor is the surge in energy prices, driving inflation to record highs and putting a strain on European businesses and households. While growth will continue this year and next, it will be much more subdued than previously expected. Uncertainty and risks to the outlook will remain high as long as Russia’s aggression continues. But there are some positives that allow us to weather this crisis. Our economic fundamentals are solid: before this war started, the EU economy had embarked on a path of strong recovery and growth
More jobs are being created in the EU economy, attracting more people into the labour market and keeping unemployment low. And as Member States put their recovery and resilience plans into full effect, this will provide a much-needed boost to our economic strength.”
Europe’s growth forecast cut as energy crisis drives up inflation
The European Commission has cut its forecast for European growth this year, and hiked its inflation forecast, as the Ukraine war hits the economy.
In its latest Spring forecasts, the EC predicts real GDP growth in both the EU and the euro area of 2.7% in 2022, down from 4% forecast three months ago.
Growth is expected to slow to 2.3% in 2023, down from a previous forecast of 2.8% in the EU (and 2.7% in the euro area).
And with energy prices having soared this year, inflation is expected to average 6.1% in 2022, and peak at 6.9% in the current quarter (it hit 7.5% in April, the highest rate in the history of the monetary union).
That’s a “considerable upward revision compared to the Winter 2022 interim Forecast” of 3.5% inflation, the Commission says. Inflation is then seen falling to 2.7% in 2023, still over the European Central Bank’s 2% target.
The Commission says:
The outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion. But Russia’s invasion of Ukraine has posed new challenges, just as the Union had recovered from the economic impacts of the pandemic.
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.
The report highlights that the Ukraine war has added to pre-existing headwinds facing the economy.
It has led to rising energy commodity prices, supply chain disruption and more expensive food and other basic goods and services.
The report says:
The main hit to the global and EU economies comes through energy commodity prices. Although they had already increased substantially before the war, from the low levels recorded during the pandemic, uncertainty about supply chains has pressured prices upwards, while increasing their volatility.
This is true for food and other basic goods and services, with households’ purchasing power declining.
The sharp falls in retail sales and industrial production in April is a sign that China’s growth rate likely to contract this quarter, warns ING.
ING analyst Iris Pang predicts that China’s GDP will contract by around 1% in Q2 2022, following the 11.1% drop in retail sales, the 2.9% fall in industrial output, and the rise in unemployment to 6.1% in April.
The overview of the data paints a gloomy picture of the economy. Our GDP forecast of -1% YoY for the second quarter is confirmed by this activity data.
The main reason is the long lockdown in Shanghai. This hurt retail sales the most, and also those factories that do not have “closed-loop operation”; if they don’t have domitories for workers, they struggle to operate. Moreover, logistics were heavily disrupted as the movement in and out of Shanghai is difficult, and most logistics were used for transporting daily necessities and medical resources.
Our concern is whether China will have lockdowns elsewhere, for instance in Bejing, Pang adds:
The key question for us is how long future lockdowns will be.
Any city that has to endure a 1-month lockdown will have its GDP in contraction on a yearly basis for that month. A 2-month lockdown may have a longer impact of more than 2 months as the jobless rate will increase, and people need time to find another job but at the same time firms are not ready to hire.
Lifestyle brand Made.com has slashed its sales forecasts and issued a profits warning, warning that the market is much weaker than forecast.
Made.com, which sells furniture, kitchen equipment and other household goods online, reports that trading has been “volatile in recent months and more challenging than anticipated at the start of the year”.
It now expects gross sales to fall by up to 15% this year, with adjusted EBITDA earnings to show a loss of between £15m and £35m.
Back in March, Made.com had forecast gross sales growth of between 15% and 25%, and positive adjusted EBITDA between £5m and £15m, on the assumption that global supply chain disruptions normalise.
Today, though, it says it the market backdrop for 2022 is “much weaker”, so it now expect to miss its target of £1.2bn of gross sales by 2025.
Nicola Thompson, Chief Executive Officer, said,
“There is no escaping the tough trading environment at the moment. However, we are laser-focused on executing our strategy and we are delivering strong progress across each of our strategic pillars. Our customers are at the heart of our business and we’re seeing a really positive reaction to our improved proposition, with average lead times consistently at the targeted 3-4 weeks average for the last two months.
MADE continues to outperform the online furniture and home market and I am confident the company will emerge in a very strong position.”
Made’s CFO Adrian Evans is stepping down in June, to be replaced by Patrick Lewis, the great grandson of the founder of John Lewis.
Shares in Made.com are down 15% at record lows, around 54p. They’ve lost almost three-quarters of their value since floating at 200p less than a year ago…
Ofgem’s proposal to update Britain’s price cap every three months could mean bills jump again in January, warns Justina Miltienyte, head of policy at Uswitch.com:
“Updating the price cap on a quarterly basis would mean a second update hot on the heels of October’s expected increase in rates.
“This could demand a swift revision to household budgets at one of the most expensive times of year, raising the possibility of a painful New Year hangover.
“Until now, the price cap has at best acted as a delay mechanism for the pain of rising wholesale prices, but it is unable to prevent harsh increases hitting customers altogether. A quarterly review means that the ability of the cap to delay the pain of rising prices is shorter.
“Conversely, if wholesale prices start falling, Ofgem would have the ability to pass these through to those on standard plans a little sooner.
“The price cap has always been a sticking plaster to deal with the problems of the energy market, and this proposed change is another attempted quick fix. The cap fails to give real, meaningful help to those who need it the most and this has been brought into extreme focus as costs have rocketed. More fundamental longer-term reform is still needed.”