Spring 2022 Economic Forecast

Russian invasion tests EU economic resilience

Each year, the European Commission publishes four macroeconomic forecasts with the aim of predicting and understanding the future state of the economy of the European Union and its Member States. These forecasts are linked to the different quarters of the year.

The Spring 2022 Economic Forecast, published today, shows that prior to the outbreak of the war in Ukraine, the outlook for the EU economy was for a prolonged and robust expansion. However, Russia’s invasion of Ukraine has posed new challenges, just as the Union had started to recover from the economic impacts of the pandemic. This has led the European Commission to revise the EU's growth outlook for the coming months downwards, and the forecast for inflation upwards.

Slowdown in growth as war exacerbates pre-existing headwinds
Real GDP growth in both the EU and the euro area is now expected at 2.7% in 2022 and 2.3% in 2023, down from 4.0% and 2.8% (2.7% in the euro area), respectively, in the Winter 2022 Forecast.

The economy of Malta is still set to continue expanding, by 4.2% in 2022 and by 4.0% in 2023 while withstanding the impact of the increase in commodity prices and the Russian invasion of Ukraine.

Energy prices drive inflation to record highs
Inflation has been picking up momentum since early 2021. From 4.6% year-on-year in the last quarter of 2021 it went up to 6.1% in the first quarter of 2022.

Inflation in the euro area is projected at 6.1% in 2022, before falling to 2.7% in 2023. Inflation is expected to peak at 6.9% in the second quarter of this year and decline gradually thereafter. For the EU, inflation is expected to increase from 2.9% in 2021 to 6.8% in 2022 and fall back to 3.2% in 2023. Average core inflation is projected above 3% in 2022 and 2023 in both the EU and the euro area.

For Malta, inflation has also been rising considerably since 2021. While in 2021 inflation remained at 0.7%, thanks to energy prices being kept low by government intervention and hedging contracts for gas, in 2022, inflation is set to rise to 4.5% while also remaining elevated into 2023 at 2.6%.

Strong and still improving labour market
Employment in the EU is projected to continue growing by 1.2% this year while unemployment rates are forecast to decline further to 6.7% this year and 6.5% in 2023 in the EU and to 7.3% and 7.0% in 2022 and 2023 respectively in the euro area.

Malta’s unemployment rate stood at 3.5% in 2021 and is set to remain broadly stable in 2022 and 2023.

Government deficits continue declining but war-related costs rising
The aggregate government deficit in the EU is set to decline further in 2022 and 2023. From 4.7% of GDP in 2021, the deficit in the EU is forecast to fall to 3.6% of GDP in 2022 and 2.5% in 2023 (3.7% and 2.5% in the euro area).

After decreasing in 2021 to around 90%, the aggregate debt-to-GDP ratio of the EU is forecast to decline to around 87% in 2022 and 85% in 2023 (95% and 93% in the euro area, respectively), remaining above the pre-COVID-19 level.

For Malta, deficit is projected to decrease to 5.6% of GDP in 2022 and further to 4.6% in 2023. The government debt-to-GDP ratio is projected to increase marginally to 58.5% in 2022 and reach 59.5% in 2023 as the negative primary balance is only partially compensated by the nominal GDP growth.

Uncertainty and risks depend on the evolution of the war
Risks to the forecast for economic activity and inflation are heavily dependent on the evolution of the war, and especially on its impact on energy markets.

Beyond the immediate risks, Russia's invasion of Ukraine is leading to an economic decoupling of the EU from Russia, with consequences that are difficult to fully apprehend at this stage.

For more detailed information on the Spring 2022 Economic Forecast click here.

To view the Spring 2022 Economic Forecast for Malta click here.