The numbers are sobering. The EU Commission expects inflation in the euro area to be at a record level this year. On average for the year, inflation is expected to reach 7.6 percent, according to the Brussels authorities’ summer economic forecast on Thursday. The main reason for this is the high energy prices. It is expected that the inflation rate will gradually fall again in the coming year. But inflation will also level off at around 4 percent in 2023.
There is a small all-clear in terms of growth. In 2022, this will remain largely stable in the euro area at 2.6 percent compared to the forecast from spring. For the coming year, however, the Commission corrected its forecast significantly downwards. It expects growth of just 1.4 percent in 2023. In terms of growth and inflation, the figures for the entire EU are on a similar level to those for the euro area.
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The trigger for this negative development was clearly named by EU Economic and Monetary Affairs Commissioner Paolo Gentiloni in Brussels on Thursday: “Russia’s baseless invasion of Ukraine is sending further shock waves through the global economy.” This would disrupt the energy and grain supply. As a result, prices rose and confidence suffered, the Italian emphasized.
“The rapid rise in energy and food prices is feeding global inflationary pressures and eroding household purchasing power,” the European Commission said in a statement. On top of that. The slowdown in growth in the US and the negative economic impact of China’s strict zero-Covid policy are also exacerbating the economic situation in Europe.
The forecasts for Germany are difficult. The reason for this is the country’s high dependence on Russian gas supplies. A sudden halt to deliveries poses a “significant downside risk” as it “could severely impact activity in key industrial sectors,” according to the EU Commission report. An inflation rate of 7.9 percent is expected for 2022 and 4.8 percent for 2023. The forecast for economic growth is 1.4 percent for 2022 and 1.3 percent for the coming year. According to the EU Commission, the delivery bottlenecks caused by the corona pandemic and the decline in exports as a result of the war in Ukraine were causing problems for the German economy.
In order to cushion the consequences of inflation, the EU Commission is examining how consumers could be relieved in an emergency. EU Economic Commissioner Gentiloni confirmed that the Commission will also put gas price caps “on the table in an emergency situation”. That would mean that Germany would have to massively subsidize gas prices for consumers and industry.
In the meantime, the draft for an emergency plan by the EU Commission is also circulating. It proposes that public buildings, offices and commercial buildings should be heated to a maximum of 19 degrees from autumn. “Acting now can reduce the impact of a sudden supply disruption by a third,” the paper said. There is now a “considerable risk” that Russia will stop gas supplies to Europe this year. The aim is to protect industries that are particularly important for supply chains and competitiveness. Households are also encouraged to voluntarily consume less.
There was a slight sign of relaxation on Thursday when looking at wholesale prices. Their increase weakened slightly in June for the second month in a row – but was still 21.2 percent compared to the previous year, as reported by the Federal Statistical Office. Price drivers in the wholesale trade were again petroleum products, raw materials such as grain and seeds, and foodstuffs such as milk and eggs. The wholesale price index is a leading indicator: It shows the price development in upstream areas, which is then later reflected in consumer prices. There had been record increases in wholesale prices in March and April.
Economists around the world expect high inflation into the middle of this decade. In the current year, 663 economists surveyed by the Munich Ifo Institute and the Institute for Swiss Economic Policy expect inflation to average 7.7 percent. The global average for 2023 and 2026 is 6.2 and 4.5 percent, respectively, according to the Ifo Institute. “Inflation is here to stay around the world,” said economist Niklas Potrafke.
A forecast by the Association of Research-Based Pharmaceutical Manufacturers (VFA), which was reported in the “Handelsblatt”, came to a similar conclusion. The economists assume, for example, that the gas price will rise from around 160 euros per megawatt hour to 178 euros in the next few months. That would be 18 times the price before the corona crisis. In 2024, however, a decline to around 78 euros is expected again.
The oil price has almost reached its peak, but the decline will only be moderate. According to the calculations, the high energy prices are having a particularly strong impact on the metal industry. At the beginning of 2023, prices are expected to be 84 percent higher there, and there should be a plus of 50 percent in the chemical industry. 30 percent for food.