A slowdown in the European economy in the last quarter of the year and a slowdown in growth in the next two years are predicted European Central Bank (ECB).

At the same time, the revised ECB forecasts significantly raise the inflation target for both this and next year, while even in 2024 it will be untargeted.

Under the weight of these forecasts, central bankers participating in the Governing Council of the ECB unanimously decided, as its President Christine Lagarde said at a press conference, to raise interest rates by 0.75%.

Anemic recovery in 2023 and 2024

According to the revised forecasts of ECB economists, the recovery of the European economy in the next two years will be sluggish.

GDP is projected to increase by 3.1% this year, mainly due to the excellent results of the first two quarters. However, in 2023, GDP growth is projected to slow down to 0.9% (from 2.1%, which was the June forecast), and in 2024 to 1.9% from 2.1%.

As Christine Lagarde explained, the eurozone economy grew by 0.8% in the second quarter of 2022, mainly due to high consumer spending and spending on food and tourism as a result of the lifting of restrictions related to the pandemic. In the summer, when people began to travel more, countries with a large tourism sector especially benefited.

However, at the same time, businesses are under severe pressure due to high energy costs and ongoing supply problems, although these problems are gradually decreasing.

4 reasons the economy will slow down this year

But while the tourism boom is supporting economic growth in the third quarter, the ECB expects the economy to slow significantly for the rest of this year. There are four main reasons for this:

1. First, high inflation limits economy-wide spending and production, and these conditions are exacerbated by interruptions in natural gas supplies.
2. Second, the sharp recovery in demand for services that followed the opening of the economy will lose momentum in the coming months.
3. Third, weakening global demand, including against the background of tightening monetary policy in many major countries and worsening terms of trade, will mean less support for the eurozone economy.
4. Fourth, uncertainty remains high and confidence is falling sharply.

On the inflation side, the revised forecasts raise the CPI to 8.1% for this year from 5.1% in March last year and 6.8% in June. In 2023, inflation is now estimated at 5.5% from 3.5% previously forecast (March forecast was 2.1%, while it is forecast to remain above the 2% target, and in particular to 2 .3% in 2023).

In the light of the foregoing, as stated by Kr. Lagarde, the ECB decided to raise interest rates by 0.75%. In addition, rates will rise even more because inflation will remain very high and likely to remain above the 2% target for a long time.

Source: RES-IPE