EU Raises Growth Outlook, Warns Of Higher Than Forecast Inflation

The European Commission raised the growth forecast for the euro area on Wednesday and warned that inflation could be higher than expected if supply constraints persist.

Eurozone is set to grow 4.8 percent this year, the executive arm of the EU said in its latest summer projections. That is stronger than the spring projection of 4.3 percent.

The outlook for next year was raised to 4.5 percent from 4.3 percent.

The EU growth outlook for this year was boosted to 4.8 percent from 4.2 percent. The projection for next year was raised to 4.5 percent from 4.4 percent.

“Uncertainty and risks surrounding the growth outlook are high but remain overall balanced,” the report said.

The commission highlighted the need for a further rapid increase in full vaccination against the coronavirus, citing the threat posed by the spread and emergence of aggressive variants.

The manner in which households and firms respond to changes in restrictions and the impact of emergency policy support withdrawal will determine the economic risks, the EU said.

The commission expects growth to return to its pre-crisis level of late 2019 in the last quarter of this year, which is one quarter earlier than expected in the Spring Forecast for the euro area.

That said, the economic activity in the fourth quarter of 2022 would remain about 1 percent shy of the level that was expected before the pandemic, the report added.

The pace of recovery is expected to be significantly different across the member states with some expected to see a return to pre-pandemic levels as early as third quarter of this year, while other are likely to take longer.

Germany’s growth forecasts for this year and next were raised. France’s projection for this year was raised, while the outlook for next year was left unchanged.

Spain and Italy had their growth projections for this year raised, while the forecasts for next year were lowered.

The commission also raised the Eurozone inflation forecast for this year and next.

“Inflation may turn out higher than forecast if supply constraints are more persistent and price pressures are passed on to consumer prices more strongly,” the report said.

The average inflation forecast for the euro area was raised to 1.9 percent from 1.7 percent projected earlier. The outlook for next year was lifted to 1.4 percent from 1.3 percent.

Price growth in the EU is projected to average 2.2 percent this year versus 1.9 percent predicted earlier. The projection for next year was raised to 1.6 percent from 1.5 percent.

Upward pressure on inflation is expected to come from rising energy and commodity prices, production bottlenecks due to the shortage of some input components and raw materials and capacity constraints vis-à-vis booming demand both at home and abroad.

Next year, pressures are expected to moderate gradually as supply constraints resolve, order backlogs clear, and demand growth moderates.

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