Business 17/05/2022

Brussels warns: inflation will reduce purchasing power and delay return to pre-pandemic GDP

European Commission almost doubles forecast for price rises in 2022 and cuts economic growth to 4.0%

2 min
European Commissioner for Economic Affairs, Paolo Gentiloni, yesterday in Brussels.

BrusselsEconomic growth is on the decline and prices are on the rise. The European Commission has presented its economic forecasts for the European economy as a whole, which was hit hard by the economic consequences of the war in Ukraine. The main obstacle for the European Union is runaway inflation , driven by the escalation of energy prices, which Spain has also suffered more than the EU average. Therefore, the Commission admits Spaniards will inevitably lose purchasing power, because their salaries will not grow as much as prices will

While last winter the Commission's economists predicted that inflation would increase by 3.6% in 2022 in Spain, now their prediction has soared to 6.3%, five tenths below the 6.8% forecast for the EU as a whole. This increase in prices, added to bottlenecks and the containment of consumption that will inevitably lead to a loss of purchasing power, also means that while in winter Brussels forecast 5.6% GDP growth for Spain this year, it now cuts this figure to 4%. The economic recovery, then, is still "robust", but part of the momentum gained in late 2021 and early this year was lost and the milestone of recovering pre-pandemic GDP is not expected until mid-2023.

"The Spanish economy was maintaining its momentum in early 2022, but disruptions in supply chains and escalating inflationary pressures in the context of war have slowed economic activity since late February," the European Commission report notes, which is also clear about the impact this will have on the state's citizens: "Wage growth will accelerate, but at a slower pace than prices, something that will lead to losses in household purchasing power and a decline in the household savings ratio in the future." Moreover, Brussels admits that the current uncertainty may cause things to get even worse. In the words of the Commission's economic vice-president, Valdis Dombrovskis, "other scenarios in which growth is even lower and inflation higher are possible".

In Spain's case, the Commission warns that a further escalation of prices may hit especially important sectors such as transport, construction or electricity-intensive industry, which in the end may cause certain investments to be "postponed" until the storm has passed. This makes the European Commission fearful of Spain's compliance with the digital and green investments scheduled in the recovery plan.

In conclusion, the Commission believes the Russian invasion of Ukraine is "testing" the resilience of a European economy, which was just getting back on track for post-pandemic growth. The figures for the Union as a whole, in fact, are not encouraging either. While last winter Brussels had forecast inflation of 3.5% for the Eurozone this year, it now puts it at 6.1%. However, the Commission remains optimistic and believes in 2023 it will moderate to 2.7%. The cut in growth is also considerable: from 4% to 2.7% by 2022 and from 2.8% to 2.3% by 2023. The Commissioner for the Economy, Paolo Gentiloni, remarked the European economy is "far from" a normal situation and highlighted the "uncertainty" surrounding the figures and any forecast.

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