Ukraine war to slash euro zone 2022 growth, boost inflation -EU

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BRUSSELS, May 16 (Reuters) – Russia’s invasion of Ukraine and the resulting surge in energy and commodity prices will slash euro zone economic growth this year and next, while boosting inflation to record levels, the European Commission forecast on Monday.

The Commission cut its growth forecast for the 19 countries sharing the euro to 2.7% this year from 4.0% predicted only in February, shortly before the war in Ukraine started. Growth is to slow to 2.3% next year, also below the 2.7% seen before.

The forecast is the first comprehensive estimate of the economic cost of the war in Ukraine for the 19 countries sharing the euro and the wider 27 nation EU.

“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,” the Commission said in a statement.

“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,” it said.

Inflation, which the European Central Bank wants to keep at 2.0% will be 6.1% this year, the Commission forecast and fall only to 2.7% next year. Before the war, the Commission expected prices to grow 3.5% in 2022 and 1.7% in 2023.

Still, despite government spending to cushion surging energy prices and support millions of refugees from Ukraine, the aggregate EU government deficit should fall in 2022 to 3.6% of GDP from 4.7% in 2021 as temporary COVID-19 support measures are withdrawn. It should fall to 2.5% in 2023, the Commission said.

In the euro zone, the aggregate deficit is to halve to 3.7% this year against 2021 and fall further to 2.5% next year while aggregated euro zone public debt is to fall to 94.7% of GDP from 97.4% in 2021 and ease further to 92.7% in 2023.

Also, despite the slower growth, euro zone unemployment is to fall further to 7.3% of the workforce this year and to 7.0% in 2023 from 7.7% in 2021.

(Reporting by Jan Strupczewski; Editing by Toby Chopra)

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