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Brussels lifts eurozone inflation forecast to 7.6% as energy crisis takes toll

Brussels has raised its inflation forecasts for this year and 2023, while lowering growth prospects as the energy crisis, fueled by Russia’s war in Ukraine, continues to hammer the European economy.

According to the European Commission, inflation in the eurozone is expected to reach 7.6 percent this year, compared to the previous forecast of 6.1 percent. Inflation is set to fall to 4 percent by 2023 – still well above the European Central Bank’s 2 percent target and significantly higher than previously forecast.

Gross domestic product growth in the eurozone, meanwhile, will be weaker than previously forecast, at 2.6 percent this year and 1.4 percent in 2023. EU-wide growth will be 2.7 percent this year and in 2023 1.5 percent .

The revised forecasts come as the ECB prepares this month for its first rate hike in a decade to prevent inflation from falling above the 2% target. The central bank is gearing up to move even as economists warn that the EU could head into recession, given the threat of widespread gas supply disruptions from Russia.

“Russia’s war against Ukraine continues to cast a long shadow over Europe and our economy,” said Valdis Dombrovskis, the commission’s executive vice-chair. “We face challenges on multiple fronts, from rising energy and food prices to highly uncertain global prospects.”

In its analysis, the commission warned that the EU is particularly vulnerable to developments in energy markets, given its reliance on Russian fossil fuels. That threat was underlined this week when Russia closed a major pipeline to Germany, bolstering concerns about Moscow’s willingness to use fuel supplies as an economic weapon against the EU.

The committee is urging member states to do more to prepare for power cuts, and according to draft plans, capitals want to reduce heating levels in public buildings and compensate industries for cutting gas use.

Paolo Gentiloni, the economics commissioner, said annual GDP growth in 2022 would be supported by the momentum of countries emerging from pandemic-related lockdowns last year, but growth would be significantly weaker than expected next year.

Inflation will be highest this year in the Baltic states, with Estonia and Lithuania both expected to see a 17 percent year-on-year price increase, while Poland, Hungary, Romania and the Czech Republic are among the other countries to see a doubling. figure price increases in 2022.

Further increases in gas prices could amplify the “stagflationary forces currently at play”, the commission warned, predicting a marked slowdown in growth in the second half of the year.

Growth is expected to be dampened by a slowdown in the US, where the Federal Reserve is aggressively raising interest rates, and by greater-than-expected damage from the coronavirus lockdown in China.

The commission said there was a risk of “adverse outcomes” in terms of economic growth, given the EU’s geographic proximity to the war and the threat of Russia cutting further energy supplies.

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