The European Commission warned on Friday that Europe will enter recession at the end of the year and inflation will be higher than forecast due to rising energy prices linked to the war in Ukraine.

“We have difficult months ahead of us,” European Commissioner for Economy Paolo Gentiloni admitted at a press conference.

He spoke of a contraction in activity in the last quarter of this year and the first quarter of 2023 and therefore a “recession” for both the eurozone and “most member states”.

Against this backdrop, GDP growth for next year was revised down to 0.3% for the eurozone, compared with 1.4% so far, although a recovery is expected in the spring.

Europe was particularly affected by the consequences of the Russian invasion of Ukraine. “It is one of the most affected developed economies due to its geographical proximity to the war zone and high dependence on gas imports from Russia,” the European Commission said in a statement.

The shock of the war in Ukraine

“Inflation continues to outpace our forecasts and lower purchasing power has weighed on consumer confidence, as businesses face higher production costs, supply constraints and tighter financing conditions,” Gentiloni said.

Brussels revised its forecast for eurozone inflation to 6.1% in 2023 from just 4% as previously expected. However, prices are expected to start falling after the expected high in late 2022.

Brussels now expects inflation for the whole of 2022 to be higher than expected at 8.5%, compared to the 7.6% previously forecast.

“Uncertainty remains extremely high” over the war and could lead to even worse numbers, Paolo Gentiloni warned.

Currently, gas reserves appear to be sufficient, but the almost complete cessation of supplies from Russia and the difficulty of compensating for this deficit at the expense of imports from other countries will make it difficult to replenish reserves for the winter of 2023/2024, he calculated.

If Europe does not prepare properly, the economic damage could be much greater than expected, he admitted. According to the pessimistic scenario, GDP could decline by 0.9% in 2023, and inflation would be much more stable.

“The risk of deindustrialization exists”

Companies are alarmed by energy prices, which are much higher in Europe than in the United States or Asia. Factories and investment projects are threatening to leave the EU, raising fears of an economic stalemate.

“This risk of deindustrialization is there,” Gentiloni acknowledged. “But this does not force me to make catastrophic predictions, because the choice of industrial location depends on many factors, not only on energy prices,” he added.

Germany, Europe’s largest economy, is expected to record the worst economic performance in the EU next year, with its GDP falling 0.6%, compared with 0.4% growth in France, 1% in Spain and 0.3% in Italy.

In 2023, inflation is expected to be the lowest in Denmark (3.7%). According to Brussels forecasts, it would be higher than the average in Germany (7.5%) and almost twice as high as in France (4.4%).

However, one hope rests on the European labor market, which should remain strong. The unemployment rate, which is at an all-time low, is expected to rise “slightly” from 6.8% this year to 7.2% in 2023 in the eurozone. (Source: AFP)