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Brussels raises eurozone growth forecast but warns over energy prices

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In this Thursday, March 11, 2021 file photo, a man walks past the Euro sculpture in Frankfurt, Germany.
In this Thursday, March 11, 2021 file photo, a man walks past the Euro sculpture in Frankfurt, Germany.   -   Copyright  Michael Probst / AP
By Josephine Joly  with AP

The European Commission has raised its growth forecast for the year for the 19 countries using the euro, saying that the economy was bouncing back from the worst of the pandemic as people went back to work in customer-facing jobs.

The autumn forecast released on Thursday raised the growth outlook for this year from 4.8% to 5.0%, while the 2022 growth forecast dropped from 4.5% to 4.3%.

This outlook depends heavily on two factors: the evolution of the COVID-19 pandemic and the pace at which supply adjusts to the rapid turnaround in demand following the re-opening of the economy.

The EU's executive branch also warned that high energy prices would eventually weigh on people's ability to spend.

"High wholesale energy prices are making their way to retail prices for households and producers, though at a varying degree and pace across countries, with potential knock-on effects on consumption and business investment," it said.

After falling sharply in 2020, energy prices have increased at "a tumultuous pace" over the last month and are now above pre-pandemic levels, the European Commission report noted.

Market prices for natural gas, a key fuel used to generate electricity, spiked to five times their level at the start of this year in Europe.

This is due to depleted reserves, lack of supply from Russia, and strong demand in Asia for available supplies of liquid natural gas delivered by ship.

"The European economy is moving from recovery to expansion but is now facing some headwinds,`" the EU Commissioner for Economy, Paolo Gentiloni, said in a statement accompanying the forecast.

Gentiloni cited the energy price spike, rising inflation, the recent increase in COVID-19 infections, and the supply-chain disruptions, as the main obstacles weighing on numerous industries.

But the main upside risk to the growth outlook is related to the potential efficiency gains and durable productivity advances triggered by the pandemic-induced structural changes.

Inflation may turn out higher than forecast if supply constraints are more persistent and above-productivity wage increases are passed on to consumer prices.

Additional sources • European Commission