Brussels slashes EU growth forecasts as euro faces ‘end of the beginning’ of US dollar slide

The worst inflation surge in a generation driven by Russia’s invasion of Ukraine will choke European economic growth, revealed fresh forecasts published today. 

Predictions for output growth this year among the 27 members of the European Union (EU) remained unchanged at 2.7 per cent, but the European Commission (EC) downgraded expansion in 2023 by nearly one percentage point to 1.5 per cent.

The cut has been sparked by inflation climbing to 8.6 per cent, more than four times the European Central Bank’s (ECB) target and the highest level since the creation of the euro in 1999.

The EC lifted its forecasts for average inflation across this year to 8.3 per cent, up from 6.8 per cent in its last report in May.

The economic spillover effects of Russia’s invasion of Ukraine have been felt harder in Europe compared to the UK and US due to the bloc’s dependency on Moscow’s energy supplies.

The European economy will almost certainly fall into a prolonged recession if Russian president Vladimir Putin shuts off gas flows in response to sanctions designed to knee cap the Russian economy in retaliation to their invasion of Ukraine.

Germany, the area’s powerhouse, whose growth projections were cut to 1.4 per cent from 1.6 per cent, would be crimped by energy supply disruption due to it leaning on industrial production to generate output.

Those fears of a possible recession this year, and the US Federal Reserve hiking interest rates rapidly, caused the euro to reach parity with the US dollar earlier this week for the first time in 20 years.

The ECB has lagged its central banking counterparts and held off raising rates. President Christine Lagarde and co are anticipated to do so at their meeting next, which would be the first rise in over a decade.

“This is “The End of the Beginning” for the euro fall,” Robin Brooks, chief economist at the Institute of International Finance, said.

“Russia’s invasion of Ukraine is a seismic shock for the Euro zone, because so much of the European growth model has been predicated on cheap Russian energy. That’s over and done with. Recession and structural headwinds are coming,” he added.