Europe's economic recovery faces hit from high energy costs

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

However, the EU’s executive branch lowered its outlook for next year, warning that painfully high energy prices would hit utility bills and weigh on people’s ability to spend. The economy also faces obstacles from logjams in supplies of parts and raw materials, rising COVID-19 infections and other factors.

The commission's autumn forecast raised the growth outlook for this year to 5% from 4.8% in the summer predictions, while the 2022 growth forecast dropped to 4.3% from 4.5%. For 2023, it estimated 2.4%.

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

He cited the energy price spike, rising consumer prices, a recent increase in COVID-19 infections, and supply-chain disruptions that are weighing on numerous industries.

Despite the stumbling blocks it's facing, Europe had “virtually closed the gap” with its pre-pandemic level of output, with growth of 2.2% in the third quarter over the previous quarter, Gentiloni said at a news conference. That is a milestone the U.S. reached earlier this year.

Fewer restrictions on activity after the worst of the pandemic meant people moved from unemployment or government furlough support programs back to work, the report said. The jobless rate of 7.4% in September was an improvement over 8.6% in the same month a year earlier.

Total employment, however, remained 1% below its pre-pandemic level and was expected to surpass that level only next year and move into expansion in 2023.

Europe's rebound has been supported by extensive government assistance in the form of paying salaries for furloughed workers, and the upswing should get continuing support from the European Union's 807 billion euro ($925 billion) recovery fund.

But energy prices, which fell sharply in 2020, have increased at “a tumultuous pace” over the last month and are now above pre-pandemic levels, the report noted. That has contributed to annual inflation of 4.1%, although some economists say the surge in consumer prices is expected to ease next year.

“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,” the EU report said.

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 due a variety of factors, including depleted reserves, lack of supply from Russia and strong demand in Asia for available supplies of liquid natural gas delivered by ship.