BusinessEurope Economic Outlook Summer 2022 - European businesses face a difficult period as costs rise and growth falls

The EU economy, in common with much of the global economy, is facing a very difficult period. Whilst some services sectors, are continuing to benefit from further reopening following Covid, many industrial sectors have seen either output hit by continuing global supply chain issues exacerbated by shutdowns in China or are suffering due to rising energy and raw material prices.

Our forecast is for the EU economy to grow by 2.6% between 2021 and 2022 (a downward revision of 1.3% from our Autumn forecast). But ‘within year’ growth in 2022 is expected to be just 0.6%, raising the prospect that individual Member States may experience at least ‘technical recessions’ during 2022. We anticipate Euro Area inflation of 6.5% in 2022, falling to 2.6% in 2023. But this will depend upon a fall in energy prices and moderate wage increases amidst a very tight labour market.

Economic projections

Policy recommendations

• Macroeconomic policymakers need to find a proper balance between controlling inflation and the need to support the revocery while avoiding recessive effects. The application of the flexibility of the Stability and Growth Pact in 2023 as a consequence of increased short-term government spending requirements related to the Ukraine war must not delay the long-term strengthening of public finances. It remains essential to make the best use of the EU’s Recovery and Resilience facility to drive productive investment and reform.
• With inflationary pressures continuing to rise, the ECB has set out further steps towards the normalisation of monetary policy. But all players need to be vigilant to the growth of inflationary expectations. Social partners need to engage responsibly in collective bargaining on wages and help ensure that temporary price rises do not give rise to a damaging wage-price spiral.
• To avoid a worsening of the current energy crisis and make the green transition economically and socially workable, the EU needs a coordinated plan to decrease Europe’s energy dependency, bring down barriers to an integrated European energy market, and facilitate investment in all zero- and low-carbon energy sources and solutions.
• The EU must pursue an ambitious trade policy that can respond to successive shock by building coalitions with like-minded partners and diversify sources of supply. This means the acceleration of ratification of negotiated bilateral trade agreements such as with Mercosur, Mexico, and Chile and the deepening of trade relations with key international partners such as the US and the UK.