After a dynamic exit from the pandemic Europe suffered greatly from the economic consequences of the Russian invasion of Ukraine. growth slowed down and inflation jumped out. However, as a result of decisive economic policy measures, most economies eventually managed to avoid a recession in the winter.
Europe now faces the difficult task of maintaining an economic recovery, containing inflation and maintaining financial stability. Growth in advanced European economies will slow to 0.7% this year from 3.6% last year, while emerging economies (excluding Turkey, Belarus, Russia and Ukraine) will also see a sharp decline to 1.1% from 4.4%. According to our latest estimates for the region, these two groups of countries will see a modest recovery in growth to 1.4% and 3% respectively next year as real wages and external demand rise.
Inflation continues to decline, but core inflation (excluding energy and food) will remain robust and uncomfortably above target. European Central Bank even before the end of next year. The recent and projected decline in energy prices will help reduce inflation (except for energy and food prices), but not enough to bring it down quickly. This projection assumes that everything falls into place.
The European Central Bank and other monetary authorities will be able to steadily reduce inflation. Any new bouts of financial stress will be contained. There will be no further escalation of the Russian war in Ukraine and related sanctions, which will keep energy prices under control. Wider geo-economic fragmentation, another “stagflation” that reduces growth and increases inflation, will also be kept at bay.
However, the situation could worsen on all fronts. Inflation, for example, could stay high for longer, and energy prices could soar again. We may also be underestimating the extent to which two successive crises, the coronavirus and the energy crisis, have damaged Europe’s productive capacity and further increased inflationary risks.
Faced with such uncertainty, central banks will have to pursue tight monetary policy until core inflation is clearly moving down towards the ECB’s target, at which point further rate hikes are required.
* Director of the IMF Europe Department. The article was published on the Foundation’s blog.
Source: Kathimerini
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