Commission: Expects inflation in the eurozone to peak in the first quarter

The European Union economy entered the new year at a weaker pace than previously predicted. Having regained pre-pandemic production levels since the summer of last year, a slight slowdown in the autumn forecast was also expected.

However, since then growth problems have intensified, and the economy is expected to recover in the second quarter of the year, and remain strong in the near future.

After a strong 5.3% recovery in 2021, the EU economy is now projected to grow by 4% in 2022, as in the euro area, and by 2.8% in 2023 (2.7% in the eurozone).

The resurgence of the pandemic last autumn and the spread of Omicron have led to new pressures on health systems and an unprecedented increase in work permits for many citizens in many EU countries.

EU governments have reinstated restrictions – although they are generally milder or more targeted than in previous waves.

Persistent supply problems, including shortages in processors and some ores, continue to weigh on production, as do increased energy sources.

The stronger than expected inflationary pressures burden the purchasing power of households.

The Commission forecasts that the impact on the economy caused by the current coronavirus will be short-lived and that most supply problems will weaken during the year.

Finally, inflationary pressures are expected to ease by the end of the year. Looking beyond this short-term turmoil, an ever-improving labor market, large accumulated savings, still favorable financing conditions and the full development of the Recovery and Sustainability Mechanism are all ready to support a prolonged and strong expansion phase.

Compared to the autumn forecast, inflation estimates have been revised upwards, as energy prices are expected to remain high for longer periods of time and price pressures widen in various categories of goods and services.

Inflation in the euro area is expected to peak in the first quarter of 2022 and remain higher than 3% until the third quarter of the year.

As pressures from energy prices and supply weaken, inflation is expected to decline significantly in the last quarter of the year, reaching below 2% next year.

Overall, inflation in the euro area is projected at 2.6% in 2021 (2.9% in the EU), 3.5% (3.9% in the EU) in 2022, before falling to 1.7% (1, 9% in the EU) in 2023.

The current wave of infections could have a longer-term economic impact than expected, bringing new problems to the critical supply chain.

Also, household consumption could increase more dynamically, as observed after previous waves, while investments could give a stronger impetus to the activity.

The Commission also points out that inflation forecasts could increase if cost pressures are passed on by producers to consumer prices to a greater extent, increasing the likelihood of strong side effects.

Risks to growth and the outlook for inflation are also exacerbated by geopolitical tensions in Eastern Europe.

Forecasts for large economies

The Commission’s forecasts place GDP growth at Germany at 2.8% in 2021, 3.6% in 2022 and 2.6% in 2023, with inflation reaching 3.2% and 3.7% in 2021 and 2022 respectively to fall to 2.1 % in 2023.

For the Francethe second largest economy in the Eurozone, the Commission sees growth of 7% in 2021, 3.6% in 2022 and 2.1% in 2023. Inflation is expected to reach 2.1% in 2021, 2.8% in 2022 and 1.7% in 2023.

In Italy GDP growth is set at 6.5% in 2021 and 4.1% and 2.3% in 2022 and 2023, with inflation climbing to 1.9% in 2021, 3.8% in 2022 and falling to 1.6% in 2023.

Finally, the Commission is waiting for its GDP Spain to reach 5% in 2021, 5.6% in 2022 and 4.4% in 2023, with inflation at 3%, 3.6% and 1.1% respectively.