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REGIONAL ECONOMIC OUTLOOK

October 2022


Europe was on its way to exit the pandemic at the end of 2021, with a broadly appropriate policy mix that supported a handover from public to private sector–led growth, while rising inflation was expected to subside as commodity prices and supply chain disruptions would ease. Russia’s war in Ukraine and its fallout changed this picture completely. Europe has been hit by a massive terms-of-trade shock that has weakened the growth outlook, further raised the level and persistence of inflation, and led to a cost-of-living crisis that threatens social cohesion. Furthermore, risks of medium-term output scarring, which was successfully avoided in the pandemic, are resurfacing. Risks to growth are on the downside, while those to inflation are on the upside, as epitomized by the energy crisis, which is fostering unusually high uncertainty and steep policy trade-offs. Policymakers will need to walk a fine line between tightening policy stances to bring down inflation and supporting vulnerable households and viable firms through the energy crisis, while standing ready to adjust the policy mix should additional shocks materialize.

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Blog: Europe Must Address a Toxic Mix of High Inflation and Flagging Growth

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