By Jan Strupczewski

BRUSSELS, (Reuters) – The Euro zone’s economic growth this year will be lower than expected due to a new wave COVID-19 infection, higher energy prices, and continuing supply-side disruptions. Inflation will also be more severe, according to the European Commission.

According to the EU executive arm, gross domestic product (GDP) in 19 member countries of the euro will grow by 4.0% and 2.7% respectively in 2019, according to its economic forecasts.

This forecast is lower than last November’s forecast of 4.3% and 2.4% growth, respectively. It is also close to the International Monetary Fund’s latest forecast of growth at 3.9% and 2.5% for 2023, respectively.

Paolo Gentiloni (European Economic Commissioner) stated that Europe was being hit with multiple headwinds. He cited Omicron’s quick spread, an increase in inflation due to soaring energy costs and continued supply chain disruptions as some of the factors. We expect these headwinds to gradually fade, and we anticipate that growth will pick up again this spring.

Inflation this year is expected to be 3.5% according to the Commission, well higher than that of the European Central Bank (2.0%) and significantly more than it had predicted from November at 2.2%. The forecast is more optimistic than the December prediction of the ECB, which projected that inflation would be 3.2%.

Concerned by the prolonged than anticipated rise in consumer price, the ECB took a hawkish approach and began preparing the markets for its end of unconventional stimulus. Some hawkish board members have already called for a rate raise this year.

The Commission and the IMF both forecast that inflation will slow down next year to 1.7%. This is below the ECB target. Therefore, a possible rate increase would occur just as prices rise again. Inflation for 2023 was 1.8% according to the ECB in December.

“Price pressures will likely remain high until summer,” Gentiloni said. After that, inflation is expected to fall as energy price growth slows down and supply shortages decrease. Gentiloni stated that there is still uncertainty, and risk.

According to the Commission, there were risks to growth prospects even though the COVID-19 virus infection wave might have a more lasting effect and cause new disruptions in supply chains. However, household consumption may grow stronger and investments, thanks to EU recovery funds, could produce greater activity.

Higher inflation can be caused by higher cost pressures being passed onto consumers from producers, and increased wage growth.

Geopolitical tensions between Eastern Europe and Russia are aggravating the inflation outlook, the Commission noted. It was referring to Russian military aggression against Ukraine.