At the beginning of the year, before the developments in Ukraine, which are mainly addressed at the end of this section, the focus in the eurozone was on the pandemic and associated containment measures, which could continue to negatively affect private consumption and the propensity to invest in the short term. The following expectations from January 2022, which do not include potential Ukraine effects, created hopes of normalisation in spite of the still fragile and visibly impaired supply chains and the situation on energy markets. The economic recovery was, as a result, generally expected to continue in 2022, in spite of short-term negative effects. Erste Group analysts therefore expected GDP growth of 4.4% for the eurozone in 2022. Further developments in the pandemic and the situation in Ukraine and all their possible effects remain the biggest risks.
Even though inflation temporarily rose higher than expected in 2021 and is expected to continue at the beginning of 2022, it is expected to drop again in the medium term due to the onset of base effects and decreasing pressure on energy prices. Inflation medium-term will depend on the labour market situation and associated wage pressure.
The outlook for Austria in 2022 is influenced by opposing factors. On the one hand, increased progress in vaccinating the population against COVID-19, strong private consumption and the announced tax reform should pave the way for a solid recovery. The tax reform is expected to support household consumption and business investment starting in mid-2022, while grants from the EU recovery fund should support public investment. On the other hand, infection dynamics, potential travel warnings and restrictions, labour shortages and ongoing supply bottlenecks represent downside risks for economic activity. Based on this, the Erste Group expects the Austrian economy to record average growth of 3.5% in 2022.
In the CEE region, the continued robust labour market and a gradual reduction of backlock demand should provide significant support for further recovery. Regular EU funding and, in particular, the recovery fund should have a noticeable effect on investments (with some political risk of Poland and Hungary not receiving these funds). In addition to the situation in Ukraine, risks related to the COVID-19 pandemic and supply chain bottlenecks also exist here. The more that any restrictions are lifted or downside risks lose their effect, the sooner the region will regain its full potential. The effects of the Russian invasion of Ukraine, which are currently still difficult to assess, will in any case have a negative impact on the growth outlook in the region. As a result, regional GDP growth of only 3.0% is expected for 2022. The pressure on prices due to base effects and, in particular, energy prices is also expected to continue in 2022. Inflation is expected to remain high for at least the first half of 2022. Although inflation is expected to decline during the course of the year as intermediary effects decrease, it is expected to remain higher than the pre-pandemic level, in part because of the relatively strong influence of the labour market. The Erste Group analysts therefore expect an inflation rate of 9.7% in 2022 followed by a noticeable decline in the price level in 2023.
The Russian attack on Ukraine at the end of February 2022 creates increased uncertainty for general economic development and therefore also for economic development in the CEE region and Austria. It was impossible to estimate the consequences at the editorial deadline. Economic dependency due to trade with Russia is relatively manageable, given that Russia is not among the top ten export destinations for the CEE region. Any sanctions against Russia should also have a relatively manageable effect on the local economies of the region. A general increase in uncertainty could nevertheless stand in the way of further recovery from the pandemic in the region. In particular, given that the region obtains a large part of its gas imports from Russia, further increases in energy prices and increases in the prices of other commodities for which Russia is a major exporter could drive inflation higher in Austria and the CEE region. The extent to which further increases in energy costs (or even reduced availability) might lead to production bottlenecks in individual industries remains to be seen. Since the conflict is so close, the yields on bonds from the region will likely increase due to risk premiums. This adds another significant factor to the question facing the European Central Bank (ECB) about how it should design its monetary policy.