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Eurozone economic outlook, May 2022

The war in Ukraine has dented the expected recovery in the Eurozone, and the direction it takes hereafter will significantly influence the region’s future economic prospects.

At the start of the year, with the end of the Omicron outbreak in sight, key indicators pointed toward a strong economic rebound in the Eurozone. Consumer confidence was positive, companies were willing to invest, and even the strains on supply chains had started to ease somewhat.1 Russia’s war in Ukraine has impacted the Eurozone’s economic outlook and substantially altered the region’s geopolitical landscape. And the longer the war drags on, the consequences will likely be greater and more acute. While the impact on the demand side—through the loss of Russia as an export market—may largely be negligible from a macroeconomic perspective, the supply side is expected to bear the real brunt through considerable increases in energy and commodity prices. Given the high levels of uncertainty, several scenarios for the Eurozone’s economic growth and inflation in 2022 are conceivable, ranging from a combination of slow growth and high inflation to moderate growth losses.

Impact on demand and supply


Russia’s invasion of Ukraine and the associated sanctions by the European Union (EU) reduced down trade relations between the two regions.2 The demand side effect from the sanctions will likely not have a major impact on the EU economy, as trade volumes between the two regions have been in decline since sanctions were first introduced by the EU after the Russian invasion of Crimea in 2014.3 Today, EU exports to Russia account for merely 4% of all EU exports.4 Conversely, the EU is Russia’s most important export market and makes up around one-third of its exports.5

The impact on the supply side is an entirely different story. The European industry receives a considerable portion of its energy and commodities imports, such as nickel and palladium, from Russia.6 The situation in the energy sector is similar. Russia is a key source of oil and gas for several European countries. For instance, Germany, Poland, Slovenia, and Italy import more than 40% of their external gas supply from Russia, Czechia and Bulgaria more than 60%, and Finland and Latvia more than 90%.7 Price hikes in energy or even outright shortages following possible embargoes can therefore threaten the European economy.

Economic sentiment falls


Results from the recent Deloitte CFO Survey fielded among large German corporates show a substantial deterioration in financial prospects and business sentiment in the Eurozone. Also, the rise in business uncertainty has been dramatic, almost reaching the levels seen during the first wave of COVID-19 in March 2020. This crisis represents the largest drop in business sentiment since the inception of the survey in 2012.8

Consequently, investment and employment plans, even though on balance still positive, are also falling back substantially. The negative effect is particularly pronounced for companies’ operating margins, which are under pressure from a higher cost base due to rising energy and commodity prices.

German CFOs also indicated that they are gearing up for high inflation in 2022. On average, they expect an inflation rate of 6.1% for the next 12 months in the Eurozone. Not only is this considerably higher than the European Central Bank’s (ECB’s) inflation target, but it is also one percentage point higher than the ECBs inflation forecast for 2022.9 Compared to the last edition of the survey, this represents a significant increase in inflation expectations, which in Autumn 2021 stood at 3.4%. What’s more, most CFOs responded that they assume that inflation rates will remain elevated in 2023. Around half think that by the end of 2023, inflation will be between 3% and 4%, whereas 42% expect inflation rates to be substantially above 4%. From the CFO perspective, the recent inflation is not a transitory shock.

Two bright spots

Two positive factors have stabilized the economy and to a degree cushioned the shock stemming from the war. First, unemployment, at slightly over 6%, remains very low by European standards.10 Second, European consumers still have high excess savings from the pandemic. Deloitte Research estimates the amount of these additional savings at more than €800 billion.11

Services sectors, especially tourism and other personal services, are likely to benefit from pent-up demand and the additional savings. Business survey data from the European Commission shows that financial analysts largely hold positive expectations for the tourism and the food and beverage sectors.12

Three scenarios for the economic outlook

Given the great uncertainties influencing the European economy right now, scenarios are a very suitable way to think about the economic outlook. The war is expected to shape Europe’s economic performance in the current year and possibly beyond, given Europe’s geographical proximity to the conflict and the dependency of several European countries on Russian energy and commodity prices. Deloitte Research developed three scenarios over a baseline to assess Europe’s economic performance in the context of the ongoing war in Ukraine.13 These scenarios are primarily meant as guidance in the highly uncertain environment; they are not forecasts in the usual sense.

The first and most desirable scenario assumes that the war will be resolved soon, allowing oil, gas, and commodity prices to normalize. This scenario would result in a limited impact on consumer spending and corporate investments in 2022. Inflation in this scenario rises slightly to 5.3% compared to the baseline of 4.3%, while growth recedes moderately to 3.1% against the baseline of 3.8%.

The second scenario assumes a continuation of the war until Autumn 2022, in which case, gas, oil and, commodity prices increase substantially with stronger effects on consumer and investment behavior. Inflation jumps to 6%, while growth drops to 2.5%.

The third scenario assumes that the war will last at least the whole of 2022. Its consequences: an explosion in the prices of gas, oil, and commodities, and profound shifts in consumer and investment behavior. Inflation in this scenario reaches 8.3% and growth sinks down to 1.06%. This scenario would bring the Eurozone very close to stagflation.

Recession risks


Nonetheless, even in the downside scenario the Eurozone is expected to continue to grow and not fall into a recession. However, slow growth would likely be accompanied by very high inflation. Although stagflation tendencies are hard to ignore in this scenario, a recession is not imminent. But an embargo on gas supplies from Russia to Europe could change that. Whether such an embargo would have a substantial effect in 2022 is debatable. Calculations by Bruegel show that the EU could replace the missing gas supplies until early 2023, assuming it mobilizes all means available, ranging from a delayed phase out of nuclear power to the rapid deployment of heat pumps, to switching from gas to coal.14 In this sense, the impact on economic growth might be more pronounced in 2023 than in 2022. However, if gas supplies from Russia are interrupted or stopped under a European embargo, the risk of a recession would increase.

In summary, the war in Ukraine has impacted the Eurozone’s economic recovery; the expected rebound and normalization after the COVID-19 pandemic are unlikely to take place. In a positive scenario, the rebound is delayed and shifted to next year, but a lot depends on the progression of the war. In any case, there seems to be a new business environment emerging from the shifting geopolitical realities. It is much too early to tell what it will look like, but geopolitical developments are more than likely to play a key role for businesses going forward. Companies will likely have to adapt not only to the short-term fallouts of the war, but also long-term shifts in geopolitical partnerships and uncertainties. Supply chain resilience and political risks are only two of the new or reemerging business issues that companies will need to incorporate into their planning.


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The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network's industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte's top management and partners abreast of topical issues.

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  1. European Commission, “Latest business and consumer surveys,” accessed April 2022.

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  2. European Commission, “Sanctions adopted following Russia’s military aggression against Ukraine,” accessed May 2022.

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  3. Eurostat, “Russia-EU – international trade in goods statistics,” February 2022.


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  4. European Commission, “Energy represented 62% of EU imports from Russia,” March 7, 2022.


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  5. European Commission, “EU trade relations with Russia,” accessed April 2022.

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  6. Institut der Deutschen Wirtschaft, “Raw material dependencies of German industry on Germany, ” April 3, 2022.

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  7. Statista, “Share of gas supply from Russia in Europe 2020,” accessed April 2022.


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  8. For data in this and the following section, see Deloitte Economic Trend Briefing: Alexander Boersch, “Sentiment change in German companies – flash results of the Deloitte CFO Survey Spring 2022,” Deloitte, April 25, 2022.


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  9. European Central Bank, “Macroeconomic projections,” March 10, 2022.

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  10. Eurostat, “Euro area unemployment at 6.8%,” March 3, 2022.


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  11. Deloitte Research, European consumers after the pandemic, April 21, 2021.

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  12. European Commission, “Business and consumer surveys,” accessed April 2022.


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  13. Boersch, “Sentiment change in German companies.” Underlying the calculations are different assumptions for gas and oil prices as well as the prices for nickel, titanium, and copper and their impact on investment and consumer expenditure.


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  14. Ben McWilliams et al., “Preparing for the first winter without Russian gas,” Bruegel, February 28, 2022.


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Cover image by: Jaime Austin

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