The ECB warns of the slowdown in the economy and sees upward risks for inflation
Activity in the euro zone has weakened in the third quarter of the year and that braking will go further at the end of the year and early 2023. The warning is made by the European Central Bank (ECB) in its latest economic bulletin in which, in addition, sees upside risks to inflation. The rise in prices peaked in October in the group of countries that share a currency at 10.7%, its highest level since the euro came into circulation.
The entity led by Christine Lagarde explains that, according to incoming economic indicators, the risks to the prospects for economic growth are clearly downward, especially in the short term. “A protracted war in Ukraine remains a significant risk,” she maintains. This could negatively affect confidence and constraints on the supply side, so energy and food costs could also remain “persistently higher than expected“. The ECB considers that the weakening of the global economy could be an additional drag on growth in the euro area.
As far as the inflation outlook is concerned, they are mostly bullish. In the medium term, the annual rate of the CPI may be higher than expected if there are increases in the prices of energy and food raw materials and higher pass-through to consumer pricesa persistent worsening of the productive capacity of the economy or Salary increases higher than expected. Conversely, a decline in energy costs and a further weakening in demand would reduce inflationary pressures. The depreciation of the euro has added to the accumulation of inflationary pressures.
The risks of war and covid
While there are some tailwinds for the global economy due to further easing of global supply chain pressures, downside risks remain, not least from continued geopolitical uncertainty due to the Russian invasion of Ukraine and a possible worsening of the evolution of the coronavirus in autumn and winter. Despite easing supply chain pressures, global trade momentum remains subdued amid deteriorating global outlook.
With the reduction of the real income of the people and the increase of the costs for the companieshigh inflation continues to hold back spending and production. Serious interruptions in gas supply have made the situation even worse, and both consumer and business confidence have plummeted. Demand for services is slowing, after a strong performance in previous quarters as economies reopen post-Covid.
Fiscal measures only for the most vulnerable
The ECB also once again sends a clear message to the governments of the region: to limit the risk of rising inflation, fiscal support measures to tackle high energy prices “must be temporary and targeted at the most vulnerable “. Their policies should provide incentives to reduce consumption and strengthen energy supply. They must be measures that “demonstrate their commitment to gradually reduce the high levels of public debt.”
The liabilities of all the countries that make up the euro zone exceeded 12 billion euros for the first time in the second quarter, although the progress of the economy allowed the ratio over GDP to drop slightly to 94.2%. The central bank insists that structural policies must be designed to increase the growth potential and supply capacity of the region and thus increase its resilience.
Wages may be picking up
Despite the fact that the labor market has continued to show a good performance in the third quarter (the unemployment rate has been at a historically low level of 6.6% in August and jobs have still been created), the weakening economy could lead to somewhat higher unemployment in the future. Stronger labor markets are likely to support higher wages, as well as some recovery in wages to offset higher inflation.
“Incoming salary data and recent salary agreements indicate that wage growth may be picking up“, remarks the ECB. Most measures of longer-term inflation expectations are currently anchored around 2%, although additional revisions of some indicators above the target “justify”, in his opinion, a continued monitoring.
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