Christine Lagarde: The European economy is slowing down – More interest rate hikes are coming

Slowdown of the European economy in the last quarter of the year and a decline in growth for the next two years, the European Central Bank predicts. At the same time, the ECB’s revised forecasts significantly raise the inflation bar for both this year and next year, while it will move outside the target even in 2024.

Under the weight of these forecasts, the central bankers participating in the ECB’s governing board decided unanimously, as revealed by its President Christine Lagarde during a press conference, the increase in interest rates by 0.75%.

As can be seen from the revised forecasts of its economists ECB, the recovery of the European economy will be anemic for the next two years. For this year, GDP is forecast to increase by 3.1% – mainly thanks to the excellent performance of the first two quarters – however, for 2023 the GDP growth rate is forecast to decline to 0.9% (from 2.1% which was the June forecast) and in 2024 to 1.9% from 2.1%.

As Christine Lagarde clarified the euro area economy grew by 0.8% in the second quarter of 2022; mainly due to strong consumer spending and dining and tourism spending as a result of the lifting of pandemic-related restrictions. In the summer, as people traveled more, countries with large tourism sectors particularly benefited. At the same time, however, businesses have come under severe pressure due to high energy costs and ongoing supply problems, although these problems are gradually diminishing.

But while booming tourism is supporting economic growth in the third quarter, the ECB expects the economy to slow significantly in the rest of this year. There are four main reasons behind this. First, high inflation constrains spending and output across the economy, and these conditions are exacerbated by natural gas supply disruptions.

Second, the strong recovery in demand for services that followed the opening of the economy will lose momentum in the coming months. Third, weakening global demand, also amid tighter monetary policy in many major economies, and worsening terms of trade will mean less support for the euro area economy. Fourth, uncertainty remains high and confidence is plummeting.

On the inflation front the revised forecasts they raise the Consumer Trim Index to 8.1% for this year from 5.1% which was last March’s forecast and June’s 6.8%. For 2023 inflation is now estimated to move to 5.5% from 3.5% which was the previous forecast, (2.1% was the forecast in March, while it is forecast to remain above the target of 2%, and specifically to 2.3% in 2023.

In light of the above as stated by Kr. Lagarde ECB decided to increase interest rates by 0.75%. Adding that there will be further rate hikes because inflation will remain very high and is likely to remain above the 2% target for a long time.

RES-EMP

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