The economic contraction in Europe is no longer a taboo: it is a concrete possibility.
In the forecast scenario managed by the European Central Bank (ECB), a scenario –the worst– of a recession close to 1% is contemplated. But this will not prevent the ECB from going ahead with the rate hike. "We will continue on our path of normalizing monetary policy," said Christine Lagarde, president of the ECB, at the meeting of the International Monetary and Financial Committee, the main advisory committee of the International Monetary Fund (IMF).
The president of the ECB has acknowledged that the growth outlook for the euro zone has darkened due to high inflation, the diminishing effects of the reopening, the weakening of world demand and the drop in confidence. "These factors are likely to cause a significant slowdown in euro area GDP growth in the second half of the year and early 2023," she warned.
The former French minister pointed out that another obstacle is that the financial markets may be too optimistic about the economic projection. This increases the risk of an abrupt market correction and financial instability, Lagarde predicted. "This situation makes valuations vulnerable to a number of potential negative surprises, whether from growth, inflation, monetary policy or corporate profitability," she insisted.
In an interview published in the Lithuanian daily Verslo Zinios, ECB Vice President Luis de Guindos confirmed that in the worst-case scenario, the eurozone's gross domestic product would contract by almost 1% next year, while the reference scenario forecast growth of 0.9%. The difference "lies in the evolution of Russia's energy supplies," said the vice president of the Central Bank.
Although the ECB continues to expect GDP growth of 3.1% in 2022 in the eurozone, the end of the year and the beginning of the next offer "a very challenging combination of low economic growth, including the possibility of a technical recession, and high inflation,” added de Guindos. The ECB forecasts that inflation will be around 10% until the end of 2022 and that it will begin to gradually decline in 2023.
The day of the meeting of the IMF and World Bank that is being held this week in Washington served so that, once again, Kristalina Georgieva, executive director of the IMF, sounded the alarm about the global economic situation. “We are entering a new danger zone”, he affirmed in the plenary of this joint meeting
"The legislators have an incredibly narrow path to walk," he acknowledged in his speech. “There is no room for mistakes. One wrong move and the challenges of the present could get worse: prolonged low growth, entrenched inflation, or even a sovereign debt crisis with contagion risk,” she warned Georgieva.
His advice is to support the interest rate hikes put in place. “We have seen central banks rapidly tighten monetary policy to restore price stability. This is the right thing to do at the moment, but it will come at a painful cost: growth will be slower and unemployment higher, as monetary tightening increases,” he noted.
Within the framework of this meeting, the banking officials of the Old Continent embraced Georgieva's argument, considering that the European Central Bank has to go ahead with interest rate hikes to control inflation.
Whatever it takes, even a recession.
