Europe’s outlook ‘darkens’ as ECB chief hedges recession

FRANKFURT, Germany — The head of the European Central Bank said on Monday that the economic outlook is “darkening” and she expects business activity to “slow down significantly” in the coming months as high energy prices and of war-driven food in Ukraine is undermining consumers’ purchasing power.

ECB President Christine Lagarde covered her remarks in the European Parliament on whether the eurozone would slide into recession, saying the bank’s base case scenario was moderate economic growth. But she appeared to qualify this by saying that some assumptions of this outlook – such as the remaining supply of Russian natural gas – have been “undone by events”.

She also mentioned that next year will be “definitely, a tough year” and that the first three months of 2023 “will most likely be negative, as we believe the fourth quarter of 2022 will also be negative.” negative output is one definition of recession, but the European recession dating committee uses a wider range of data, including employment figures.

Russia’s invasion of Ukraine “continues to cast a shadow over Europe”, driving up energy prices that are dampening consumer spending and production for companies hit by higher costs, said The guard.

Meanwhile, the strong summer rebound in tourism-dependent countries was fading, while weaker global demand would mean less support for Europe’s economy, which is heavily trade-driven. Higher interest rates from central banks in major economies would also dampen demand outside Europe.

Lagarde urged governments to target aid programs to those most in need, saying blanket aid would not help fight inflation. As countries clamor to help households and businesses in the face of soaring energy costs, she said most of the aid announced so far was not sufficiently “tailored, temporary and targeted” and that there was “work to do” to adjust the approach.

The ECB raised interest rates by three-quarters of a percentage point at its last meeting on Sept. 8, the biggest rate hike in its history, and said it would hike rates at future meetings.

It joins the US Federal Reserve and other central banks in raising interest rates sharply to fight a global spike in inflation. The 19 countries that use the euro saw annual consumer prices rise to a record 9.1% a year in August, well above the ECB’s 2% target considered the best for the economy.

Many economists predict that the Eurozone will slide into a recession at the end of this year and the beginning of next year. Lagarde, however, said the bank’s baseline scenario is that growth will not turn negative, but that a much bleaker worst-case scenario would include a 2023 recession. This worst-case scenario involves Russia cutting off the last trickle of gas natural gas circulating in its gas pipelines to Europe.

Lagarde said the baseline scenario, set before Russia cut the main Nord Stream 1 gas pipeline to Germany, predicted growth of 0.9% next year. The more gloomy forecast points to a decline of 0.9%. She said her personal outlook was that the outcome would be “somewhere in between” and more will be known when new banking forecasts are released in December.

The state-owned Gazprom has steadily reduced deliveries to a fraction of what they were before the war. European officials say it is energetic blackmail aimed at pressuring their support for Ukraine and sanctions against Russia. Some Russian gas is still flowing in pipelines through Ukraine and Turkey.

Europe is more exposed to the economic fallout of war than other major world economies such as the United States or China. Indeed, Europe for years relied on Russia as a major oil and gas pipeline supplier – ties that have now come undone. Russia has halted most gas shipments, while Europe is set to ban most Russian oil imports later this year.

The Paris-based Organization for Economic Co-operation and Development said on Monday it expects the eurozone economy to grow 1.25% this year in the 19 countries using the euro and 0.3% in 2023. But she said there were risks of a deeper downside in several European countries. economies during the winter months and that the impact of energy shortages could push many countries into recession next year.

Comments are closed.