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IMF cuts eurozone 2022 growth forecast on Ukraine war

International Monetary Fund. (Photo: Jordan News)
PARIS  — The war in Ukraine will weigh heavily upon economic growth in the eurozone, the IMF said Tuesday, as the conflict wreaks havoc on energy prices and the manufacturing sector.اضافة اعلان

The International Monetary Fund revised down its eurozone growth forecast for 2022 to 2.8 percent, from 3.9 percent in its January estimate, with the region’s biggest economy, Germany, taking a heavy hit.

“The main channel through which the war in Ukraine and sanctions on Russia affect the euro area economy is rising global energy prices and energy security,” the IMF said in its World Economic Outlook report.

The war has hurt some countries like Italy and Germany more than other European nations because they had “relatively large manufacturing sectors and greater dependence on energy imports from Russia”, the IMF said.

Germany’s economy is now expected to grow by 2.1 percent this year, down from the previous forecast of 3.8 percent. Italy will also take a heavy hit, with growth of 2.3 percent compared to an earlier forecast of 3.8 percent.

After Moscow’s invasion in February, the West including eurozone countries imposed sanctions on Russia’s financial system, aviation sector and other major parts of the economy.

Nearly two months later, prices are rising. Oil remains above $100 per barrel after reaching historic highs in March, while the price of gas, wheat, aluminum, nickel, and other raw materials have soared.

As a result, consumer price inflation in the eurozone has surged to 7.5 percent, an all-time high.

Pierre-Olivier Gourinchas, chief economist of the IMF, warned during a briefing that any tightening of sanctions would lead to “a more significant reduction in economic activity in the euro area”.

But in comments likely to provide a little relief, Petya Koeva Brooks, deputy director in the IMF’s research department, said the Fund does not expect a recession in the eurozone area.

ECB holds steady

The drag from the war in Ukraine comes as the eurozone economy was set to fully recover from the pummeling it took from the pandemic in 2020.

The IMF had predicted last October that eurozone growth would be 4.3 percent in 2022 before lowering the forecast in January due to a global supply chain crisis and the emergence of the Omicron variant of the coronavirus.

The IMF’s latest report also lowered the eurozone’s growth outlook for 2023 to 2.3 percent, down from 2.5 percent previously.

But it slightly increased its forecast for Germany to 2.7 percent. Italy’s growth, however, will slow further to 1.7 percent.

The war is “severely affecting the euro area economy”, European Central Bank chief Christine Lagarde said last week, pointing to a fall in economic confidence and persistently high energy costs for households and businesses.

The ECB last month slashed its growth forecast for 2022 to 3.7 percent from the 4.2 percent it previously predicted.

It also warned inflation will soar in the eurozone area, but it has yet to follow the US Federal Reserve in raising interest rates to tame prices.

But the IMF’s Gourinchas said that with multiple issues facing Europe including rising inflation, “there is a risk there might be a need for more of a tightening” from the ECB.

Similarly, the Organization for Economic Cooperation and Development said in March that eurozone growth risked being cut by up to 1.4 percentage points while inflation would increase by 2.5 percentage points over a year if the war’s impact proves to be lasting.

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