In its latest World Economic Outlook released on October 23, the IMF warned that weakness in many European economies could lead to a deeper recession across the region, while escalating prices may pose the risk of increasing social tension.
Europe’s advanced economies will grow by just 0.6% in 2023, according to the IMF’s forecast. Emerging economies’ growth, excluding Turkey and countries involved in the conflict in Ukraine, will also slow down to 1.7%. Europe’s leading economy, Germany, will shrink by 0.3% in 2023, due to its heavy dependence on gas supplies from Russia, while Italy’s economy will shrink by 0.2% next year.
The IMF report comes as European countries are grappling with escalating inflation and a deepening energy crisis. Soaring energy prices have reduced the purchasing power of households, driving up production costs. Inflation in the euro area (Eurozone) in September 2022, increased to 9.9% over the same period last year.
This is the highest level since the euro was introduced in 1999. High inflation in September was mainly due to a sharp increase in energy prices, up 40.7% compared to the same period in 2021. Besides, food prices also rose by 12.7% over the same period last year, while prices of services also increased strongly.
The IMF stated that weak growth across Europe next year, reflects the spreading effects of the Russia-Ukraine conflict, in particular the sharp downward revision to the economies most affected by Russia’s cutting off gas supplies.
IMF experts said that although the Eurozone is forecast to avoid a recession, the GDP of 19 eurozone countries is forecast to grow by only 0.5% in 2023, much worse than previous forecasts. Meanwhile, financial conditions are tougher for the Eurozone, with interest rates rising by 50 basis points in July 2022 and 75 basis points in September 2022. Inflation as well as energy prices skyrocketed in the first eight months of the year, forcing the European Central Bank (ECB) to raise interest rates, to support the economy in the face of a recession.
The IMF said that in the coming time, the biggest risk for European economies is still the disruption of the energy supply in the winter. The lack of energy supplies and food shortages will cause deeper economic injuries for the European countries. The IMF predicts that inflation in Europe will persist and social tensions may worsen, due to the rising cost of living.
Therefore, central banks need to continue to raise interest rates. Meanwhile, the new support packages that governments in Europe offer, are only ‘a drop in the ocean’ and cannot make up for the current economic difficulties.
In addition to the above difficulties, the external environment is also unfavourable to the European economy. The Russia-Ukraine conflict has not shown any signs of cooling down, which means that energy supplies to Europe and supply chains continue to be disrupted. Meanwhile, the world’s largest economies such as the US and China, are facing difficulties and slowing down. Fitch Ratings forecast that the US economy will fall into a recession from the second quarter of 2023, while the CEO of Goldman Sachs Group believes that the US economy may fall into a recession in early next year.
The risk of a recession of the European economy and other world’s leading economies is “shadowing” the prospect of recovery of the global economy. And right now, governments need to prepare resources to deal with an economic crisis that may occur in 2023.
