Brussels, 10 February 2022
Good morning and welcome to this press conference on the European Commission’s Winter interim Economic Forecast.
Let me begin with the four key messages emerging from this forecast:
First, the headwinds to economic growth have intensified since Autumn, weakening its momentum in the short term.
- The resurgence of the pandemic has led to tightened containment measures and a softening of the economic momentum, particularly in services.
- Supply constraints have grown and energy prices have continued to be very high. This has contributed to dent further manufacturing production and again pushed inflation above expectations, with a negative impact on consumers’ purchasing power.
Second, the fundamentals remain solid, which is why we expect that the EU economy will regain traction.
- As the wave of infections passes, and when, more gradually, supply conditions normalise and inflationary pressures moderate, growth is expected to return to a solid expansionary path.
- A continuously improving labour market, high household savings, still favourable financing conditions, and the full deployment of the Recovery and Resilience Facility are all projected to sustain a prolonged expansionary phase.
- These factors have led us to revise slightly downwards our growth forecast for this year and to revise it slightly upwards for 2023. GDP in the EU is now expected to increase by 4.0% in 2022 and 2.8% in 2023.
Third, inflation is revised upwards.
- Inflation picked up during the last months of 2021 on the back of higher energy prices and continued supply bottlenecks. Energy prices are now set to remain high for longer and price pressures are broadening to several categories of goods and services.
- For 2022, these factors are expected to push inflation to 3.5% in the euro area and 3.9% in the EU, before moderating below 2% in 2023 in both the EU and the euro area.
Fourth, risks are balanced for economic growth but skewed to the upside for inflation.
- This outlook is based on the assumption of shortlived economic effects of the current pandemic wave, mainly in the first quarter, and no major disruptions thereafter.
- However, uncertainty will remain elevated.
Let me now explain some elements of our forecast.
The loss in economic momentum since November last year is largely linked to the surge in COVID-19 infections. Several Member States re-introduced or tightened containment measures, though the restrictions have tended to be milder or more targeted than in previous waves, thanks to the high share of vaccinated European citizens.
The Omicron variant has been spreading rapidly, with daily new cases still chasing one record high after another in many countries – though recent days give cause for optimism that the peak has passed for Europe as a whole. Importantly, a decoupling beween number of cases, on the one hand, and hospitalisations and deaths, on the other hand, is a sign of the potentially lower severity of the Omicron variant.
Still, the sheer number of infection cases has led to renewed strain on healthcare systems and an unprecedented surge of absences from work in many EU countries.
Besides the pandemic, a number of additional factors contributed to the softening of the economic momentum over the last few months.
The Commission’s business surveys show that in the EU economy, shortages of equipment or material, as well as labour shortages have grown in importance since October 2021. Shortages of material and equipement are particularly severe in manufacturing while services are mainly affected by shortage of labour.
The very high prices of energy are also weighing on production, through high production costs, and on households’ purchasing power. I will come back to this later when presenting the inflation forecasts.
Following a lower-than-expected estimated turnout in the last quarter of 2021 – at 0.4% for the EU as a whole, vs 0.8% in our previous forecast – we have revised down the growth forecast for the first quarter, with growth expected at 0.4% in the EU and 0.3% in the euro area (down from 0.8% in the previous Forecast).
The current soft patch is expected to be short-lived, with the economy set to return to its previously projected expansionary path as of the second quarter.
Over the next two years, private consumption is expected to remain the key growth driver, thanks to abating inflation, an improving labour market, and record accumulated savings. Investment should also remain dynamic, not least thanks to the large boost provided by the implementation of the RRF.
Overall, after somewhat better than expected growth in 2021, both the EU and euro area economies are forecast to grow by 4.0% in 2022. This is 0.3 point lower than projected in the Autumn, due to the forgone output in the last quarter of 2021 and the first quarter of 2022. For 2023, the annual growth rate is set to benefit from the expected rebound later this year. It is now projected at 2.8% in the EU and 2.7% in the euro area.
Looking now at the international picture: the acceleration in global growth (excluding the EU) to 1.5% quarter-on-quarter in 2021-Q3 corroborated the positive trend in the global economy.
However, the emergence of Omicron is also expected to dent the global growth momentum. Softer growth this year is notably projected in the US and China, and the recovery in services trade is expected to be slightly slower than previously expected. Just look at the Winter Olympics and you’ll have a sense of the persistent impact of the pandemic at global level. China is also particularly vulnerable to the unwinding of the property-related debt crisis. The faster than anticipated pace of monetary policy tightening in the US is also likely to contribute to a softer global outlook.
Overall, real global GDP (excluding the EU) is now expected to grow by 4.2% in 2022 (-0.3 pps. versus the Autumn Forecast) and 3.8% in 2023 (+0.1 pps.), still with wide variations both within and between regions.
The tightening of containment measures since last autumn led to renewed disruptions in services activity. This is reflected in softening sentiment in the sector as shown by recent survey results, such as the European Commission’s surveys and the Purchasing Managers Index.
Survey data for the manufacturing sector sends more mixed signals. The sector was rather immune to the recently re-introduced or tightened containment measures. Yet the slight deceleration in the manufacturing Purchasing Managers’ Index in the fourth quarter of 2021 and in January may be indicative of supply bottlenecks continuing to weigh on industrial production.
Labour markets performed very well last year. In the last quarter of 2021, the unemployment rate fell below its pre-pandemic readings and reached record-lows of 6.4% in the EU and 7.0% in the euro area in December.
Employment in the EU increased by 0.9% in the third quarter, adding around 1.8 million jobs in the EU, and closing the gap with the pre-pandemic levels. The gap in terms of hours worked narrowed to just one percentage point, but it is still there.
Despite its strong performance, employment growth is not keeping pace with surging labour demand. As I already mentioned, labour is an increasingly important factor limiting production in a number of sectors. The Commission’s business surveys show that reported labour shortages reached all-time highs in the industry, services and construction sectors in January.
Looking ahead, the Commission’s Employment Expectations Indicator in January still shows robust labour demand, even if it eased somewhat from the November peak. Overall, we continue to expect employment to evolve in tandem with economic activity.
In 2021, we saw a rapid and steady increase in inflation that is estimated to have reached a record high of 5.1% in the euro area in January 2022. High energy prices, supply bottlenecks and base effects are acting powerfully to push up consumer prices.
Compared to the Autumn Forecast, inflation projections have been revised up significantly for this year. Indications from future contracts show that energy prices are now set to remain high for longer and price pressures are broadening to several categories of goods and services.
Inflation in the euro area is projected to peak in the first quarter of 2022 and remain above 3% until the third quarter of the year. As the pressures from supply constraints and energy prices fade, inflation is expected to decline markedly in the final quarter of the year and settle at below 2% next year. Overall, inflation in the euro area is forecast to increase from 2.6% in 2021 (2.9% in the EU) to 3.5% (3.9% EU) in 2022, before declining to 1.7% (1.9% EU) in 2023.
The expectation of moderating inflation is compatible with recent market-based inflation expectations for the medium- to long term, which remain anchored at just below 2%.
In Germany, after growing by 2.8% last year, real GDP is expected to increase by 3.6% in 2022 and 2.6% in 2023. Growth has been revised lower for 2022 as lingering supply bottlenecks took a heavy toll on the last quarter of 2021 and this quarter. Record-high order books in industry and elevated business sentiment suggest that the economy is well set for an expansion once supply issues ease later this year.
In France, real GDP grew by 7.0% last year and is expected to increase by 3.6% in 2022 and by 2.1% in 2023. Private consumption is set to keep on increasing sharply this year, benefitting from the dynamism of the labour market. Investment is expected to remain robust as it continues to be supported by the Recovery and Resilience Plan and favourable financing conditions.
For Italy, after expanding by 6.5% in 2021, real GDP growth is expected to reach 4.1% in 2022 and 2.3% in 2023. The Italian economy ended 2021 on a solid footing, almost back to pre-crisis levels. Domestic demand is set to remain the main pillar of the output expansion, with the Recovery and Resilience Plan acting to lift investment.
In Spain, after growth of 5.0% in 2021, real GDP is expected to expand by 5.6% in 2022 and 4.4% in 2023. A revival in tourism will boost the industry and help the job market, while the Recovery and Resilience Plan is expected to spur public and private investment over the forecast horizon.
Finally, in Poland domestic demand boosted the economy in 2021, with growth of 5.7% a swift recovery from the crisis. Real GDP is projected to increase by 5.5 % in 2022 and 4.2% in 2023. Growth is expected to be driven by a strong expansion of private consumption and investment. The economy continues to benefit by a robust and strengthening labour market.
Uncertainty and risks around the winter forecast remain high, also because the future course of the pandemic remains unpredictable.
With some of the adverse risks since the Autumn Forecast having materialised, the balance of risks to the growth outlook looking forward is now broadly even.
On the downside, the current wave of infections could have a longer lasting economic impact than assumed, bringing fresh disruptions to critical supply chains. Outside the EU, this risk is greater, as vaccination rates in many regions remain low.
On the upside, household demand could accelerate more strongly than expected, as already experienced in the period following the reopening of economies in 2020 and last year. Furthermore, investments fostered by the RRF could generate a stronger impulse to activity through e.g. stronger cross-sector and cross-country spillovers.
The inflation projections are subject to upside risks if cost pressures are passed on from producer to consumer prices to a larger extent than expected, which would increase the likelihood of strong second-round effects. Furthermore, an acceleration of global inflation could entail a faster than anticipated tightening of monetary policy, with repercussions on global financing conditions and demand.
Risks to both the growth and inflation outlook are also aggravated by the current geopolitical tensions. Here we have something different from a downside risk to an economic forecast. Peace, stability and economic growth are of course strictly connected.
And now, I am ready to take your questions.
*Updated on 10/02/2021 at 16:18