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Inflation, investor jitters, Ukraine crisis weighing on Europe's growth prospects

Xinhua | Updated: 2022-06-02 10:07

Photo taken on Jan 1, 2022 shows the headquarters of the European Central Bank illuminated to celebrate the 20th anniversary of Euro banknotes and coins in Frankfurt, Germany. [Photo/Xinhua]

ROME - Soaring prices are expected to limit economic growth in Europe this year, with gross domestic product estimates for 2022 being lowered across the continent.

Prices in Europe started climbing late last year, pushed mostly by supply chain issues.

But the conflict between Russia and Ukraine, which started in late February, had an immediate impact on energy prices, putting further upward pressure on prices for transport, industry, food and heating.

Consumer prices in the eurozone rose by an average 8.1 percent in May, the highest annual level since the creation of the common currency in 1999, Eurostat, the statistical office of the European Union (EU), said on Tuesday.

The figure was higher than the previous record of 7.4 percent set a month earlier, and it also outpaced consensus estimates of a 7.8-percent increase for May.

In the eurozone, energy costs were 39.2 percent higher than a year earlier, Eurostat said.

These trends are taking a toll on growth prospects for Europe, especially in the eurozone.

Last week, ratings agency Moody's lowered its 2022 growth forecast for the eurozone to 2.3 percent from 2.5 percent. Moody's identified the crisis in Ukraine as the main driver behind the lowered growth prospects.

Meanwhile, the EU member states decided late on Monday to ban around 90 percent of Russian oil imports by the end of the year. This has unnerved investors in Europe's main economic centers, with the blue chip stock market indexes in Frankfurt, Madrid, Milan and Paris all ending Tuesday's trading day at least 0.7 percent lower.

Christine Lagarde, president of the European Central Bank (ECB), wrote in a blog post on May 23 that euro-denominated interest rates were likely to be raised this year.

"Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter," Lagarde wrote.

"If the euro area economy were overheating as a result of a positive demand shock, it would make sense for policy rates to be raised sequentially above the neutral rate," read the post.

The situation in Italy is particularly difficult. The country's National Institute of Statistics (ISTAT) reported on Tuesday that Italy's economy grew by 0.1 percent in the first quarter of 2022 against preliminary estimates of a 0.2 percent contraction.

But ISTAT's estimates for economic growth for the year as a whole were just 2.6 percent, compared to estimates as high as 4.7 percent before the start of the conflict in Ukraine.

This dovetails with Moody's estimates. In its latest report on European economies, Moody's predicted that Italy's economy would grow 2.3 percent this year, down from previous estimates of 3.2 percent.

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