S&P cuts forecast for Eurozone growth

S&P Global Ratings has cut its forecast for economic growth in the Eurozone, as energy prices soar following Russia’s invasion of Ukraine.

The credit ratings agency has reduced its annual growth forecast to 3.3% from 4.4%. It said the region was likely to avoid recession, but that growth would be held back as higher gas and oil prices - caused by the war - hit household spending.

It noted: "Thanks to a strong recovery momentum and sufficient cash buffers, we don’t expect a full-year recession but rather a drop in GDP growth to 3.3% this year versus 4.4% previously.

"Uncertainty surrounding our forecasts is higher than usual, with downside risks to growth for 2022 and upside risks for inflation this year and the next."

S&P believes Eurozone inflation will hit 5% this year and stay above 2% in 2023.

If downside risks do not materialise, S&P said the European Central Bank would be able to increase rates in December in response, with a first hike potentially coming before that, in September. However, more severe scenarios includes a higher and longer oil price shock, outright cuts to the gas supply and more acute supply challenges, such as punctual production stoppages.

The agency noted: "In both the baseline and the severe scenario, we see rising inflation despite a weaker growth outlook as an argument for the ECB to start normalising monetary policy this year, but without rushing."

Eurozone GDP was 5.3% in 2021 as the region rebounded from the worst of the pandemic. In its Winter Forecast, published in February before the invasion of Ukraine, the European Commission predicted the bloc’s economy would grow by 4.0% this year and 2.7% in 2023.