EU cuts euro zone growth forecast as Ukraine war bites

BRUSSELS • The European Commission yesterday sharply cut its euro zone growth forecast for this year to 2.7 per cent, blaming skyrocketing energy prices caused by Russia's invasion of Ukraine.

The war also spurred the European Union's executive to revisit its euro zone inflation prediction for this year, with consumer prices forecast to jump by 6.1 per cent year on year, much higher than the earlier forecast of 3.5 per cent.

"There is no doubt that the EU economy is going through a challenging period due to Russia's war against Ukraine, and we have downgraded our forecast accordingly," EU executive vice-president Valdis Dombrovskis said.

"The overwhelming negative factor is the surge in energy prices, driving inflation to record highs and putting a strain on European businesses and households," he added.

The EU warned that the course of the war was highly uncertain and that the risk of stagflation - punishing inflation with little or no growth - remained a real threat going forward. If Russia, the EU's main energy supplier, should cut off its oil and gas supply to Europe completely, the commission warned that the forecast would worsen considerably.

"Our forecast is subjected to very high uncertainty and risks," EU commissioner Paolo Gentiloni told reporters. "Other scenarios are possible under which growth may be lower and inflation higher than we are projecting today. In any case, our economy is still far from a normal situation," he said.

For the EU as a whole, including the eight countries that do not use the euro as their currency, the commission had also forecast growth of 4 per cent in February, but has now cut this to 2.7 per cent, the same level as for the euro zone.

The EU's warning for the months ahead lands as the European Central Bank is increasingly expected to increase interest rates in July to tackle soaring inflation. Critics warn that this could put a brake on economic activity just when the economy faced the headwinds from the war in Ukraine.

Separately, EU foreign ministers sought to publicly pressure Hungary yesterday to lift its veto of a proposed embargo on Russian oil, with Lithuania saying that the bloc was being "held hostage by one member state".

The ban on crude imports proposed by the European Commission early this month would be its harshest sanction yet in response to Moscow's Feb 24 invasion of Ukraine and includes carve-outs for EU states most dependent on Russian oil.

Germany, the EU's biggest economy and a major buyer of Russian energy, said it wanted a deal to authorise the oil embargo, which it suggested could last for years.

"I am confident that we will find agreement in the coming days," German Foreign Minister Annalena Baerbock said as she arrived for a meeting with her EU counterparts. "We need to prepare it extremely well because it needs to be sustainable."

But Hungary, Moscow's closest ally in the EU, has said it wants hundreds of millions of euros from the bloc to mitigate the cost of ditching Russian crude. The EU needs all 27 states to agree to the embargo for it to go ahead.

"The whole union is being held hostage by one member state... we have to agree, we cannot be held hostage," Lithuanian Foreign Minister Gabrielius Landsbergis said.

Meanwhile, the EU's plan to offer energy companies a way to pay for Russian natural gas without breaching sanctions helped send prices lower for a second day as invoice deadlines loom.

Benchmark gas futures in the Netherlands fell as much as 5.5 per cent, extending last Friday's 9.2 per cent drop.

The European Commission is set to offer buyers new guidance on how to pay for gas, satisfying President Vladimir Putin's demands while avoiding a potential violation of sanctions imposed as a result of Russia's invasion of Ukraine.

Russia had asked firms to accept a new transaction method involving opening two accounts at Gazprombank, one in euros or dollars and the other in roubles.

In the new guidance, the commission plans to tell companies they should make a clear statement that they consider obligations fulfilled once they pay in euros or dollars, in line with existing contracts, according to people familiar with the matter.

AGENCE FRANCE-PRESSE, REUTERS, BLOOMBERG