On July 14, the European Commission published its interim summer 2022 economic forecast. It updates the spring 2022 forecast published on May 16, focusing on gross domestic product and inflation developments in all EU member states.
The updated forecast is less optimistic than that published two months earlier. The outlook for the EU economy worsened and is set on a path of lower growth and higher inflation compared to the spring forecast. It is projected to grow by 2.7% in 2022 and 1.5% in 2023. Annual average inflation is expected to peak at historical heights in 2022, reaching 8.3%, before gradually easing to 4.6% in 2023.
The European Commissioner for the Economy, Paolo Gentiloni summarised the outlook for the EU economy very realistically when he commented: “The risk of a storm is more than hypothetical, it is becoming a possibility but we are not there yet.”
Indeed, many of the negative risks identified in the spring report have now materialised, making the EU economy more vulnerable to rising energy and food prices and to an uncertain global outlook. Gentiloni urges the EU to prepare for the storm and, if possible, avoid it by showing leadership and implementing policies based on solidarity, sustainability and security.
Foremost among the negative risks is the escalation of tensions between Russia and the EU as a result of the war in Ukraine. The consequences of a protracted war are hitting the EU economy, both directly and indirectly.
Among the direct shocks the most damaging are the rapid increases in energy and food commodity prices, which are feeding inflation, eroding the purchasing power of households and triggering restrictive monetary policies.
In spite of huge efforts to diversify energy supplies, the EU economy remains vulnerable to developments in the energy markets because of its high dependence on Russian fuel oils. Gas prices reached all-time highs creating an energy inflation that is difficult to control. Growing concerns about deliveries are pushing energy prices even higher.
Higher energy costs are passed on to goods and services. Households’ per capita consumption costs increased on average by around €160 per month.
Commission harmonised EU-wide consumer surveys indicate that consumers’ assessment of the financial situation of their household has deteriorated for all income groups following several months of price increases.
As expected, the deterioration has been more significant for low-income groups. More than 21% of households within the lowest income bracket reported that they were in financial distress.
The commission’s surveys also indicate the extent to which disposable income of households is being eroded by high inflation. Consumers are scaling down their intentions to make major purchases or save money and are cutting down on consumption. Retail trade data confirms that, in response to rising fuel and food prices, households reduced consumption of other categories of goods such as clothes. Services which were badly hit by pandemic-related measures increased only marginally.
The dominant negative risks remain the impact of the war in Ukraine and geopolitical tensions- Edward Zammit Lewis
Besides the war in Ukraine there are other developments leading to lower growth and higher inflation. Among them there are the deceleration of the US economy, with the risk of a mild recession, and the effects of the strict lockdowns implemented by China’s zero-COVID policy. Moreover, supply chain disruptions continue to hamper global activity.
Many governments are opting to tighten monetary conditions to counter inflationary pressures. The European Central Bank raised interest rates for the first time in 11 years as it tries to control soaring eurozone inflation. As explained by the president of the ECB, Christine Lagarde, the aim is to steer the EU economy back to stable prices.
Luckily, in spite of recent increases in infections, the COVID-19 pandemic is not expected to cause any major disruption to the EU economy, though the risk cannot be totally excluded. The dominant negative risks remain the impact of the war in Ukraine and geopolitical tensions.
In this context, the situation remains bleak since geopolitical tensions with Russia are not expected to normalise soon and new increases of gas prices can push inflation even further and stifle growth.
Malta is not immune to rising international energy and commodity prices.
One appreciates that Malta is a peripheral island heavily dependent on logistics and imports. Government interventions, such as subsidising the price of energy for families and businesses and hedging contracts for gas supply, kept energy prices unchanged.
Moreover, the Maltese economy has been much more resilient to the negative impacts of the pandemic and the war in Ukraine than that of the EU as a whole. Growth in 2022 is forecast to reach 4.9%, much higher than the EU’s average of 2.7%, thanks to strong domestic consumption and to the very rapid rebound of tourism services.
Strong leadership and solid political stability, unlike countries such as the UK and Italy, are contributing to better economic prospects.
In this context, it is our responsibility to continue to adhere to socially-oriented economic policies while battling inflation and pursuing further economic growth. This will ensure that no one is left behind and that the social, health and economic security of all will continue to be safeguarded.
This has been the hallmark of Maltese governments since 2013. Prospects are positive but we have to increase and sustain this momentum to prepare for and to weather the storm.
Edward Zammit Lewis is a Labour MP