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EU Economy Struggles as Ukraine Conflict, Inflation, Natural Disasters, and Rising Interest Rates Take Toll

Conflict, Disasters, Economy, Inflation, Interest, Natural, Rates, Rising, Struggles, Toll, Ukraine

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The European Commission Revises Down Economic Forecast

The European Commission has revised down its economic forecast, warning that stubbornly high prices for goods and services are “taking a heavier toll than expected.”

Economic Growth Projections

  • The European Union as a whole is now predicted to grow by a modest 0.8% this year, slightly down from the 1% projected in spring, and by 1.4% in 2024.
  • The eurozone will see similarly downgraded rates: 0.8% in 2023 (compared to 1.1% in the previous estimation) and 1.3% in 2024.

Impact on Germany and Poland

Germany, the bloc’s industrial powerhouse, will experience a downturn of –0.4% this year, a troubling sign that is “affecting everyone,” according to Paolo Gentiloni, the European Commissioner for the economy. Poland, a neighboring economy, will expand by just 0.5% in 2023 after posting a healthy 5.1% rate in 2022.

High Prices and Inflation

The report highlights the extent to which high prices have affected all sectors of the economy, going beyond energy. Inflation among countries that use the euro is expected to reach 5.6% in 2023 and 2.9% in 2024, still far from the European Central Bank’s 2% annual target.

Monetary Policy and Fiscal Policies

The European Central Bank will hold a meeting on Thursday to decide on its monetary policy. The report emphasizes the need for governments to carefully craft their fiscal policies to continue public investments without fueling inflationary pressures.

Causes for Loss of Momentum

  • Weaker consumption
  • Slowdown in credit provisions
  • Sluggish industrial output
  • Uncertainty unleashed by Russia’s war on Ukraine
  • Damage inflicted by natural disasters, such as floods and wildfires

Reassessing Economic Forecasts

The frequency of natural disasters prompts the European Commission to reassess the way it crafts economic forecasts. The direct and indirect costs arising from reconstruction should be taken into account in the forecasts.

Labour Market and Wages

The EU’s labour market remains “exceptionally strong,” with an unemployment rate of 5.9% in June. However, the rise in wages has failed to outweigh inflation, resulting in a loss of purchasing power for workers.

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