Euro Area Policies: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Euro Area; IMF Country Report No. 23/264

IMF Staff Country Reports, July 19, 2023

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Canonical URL: Euro Area Policies: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Euro Area; IMF Country Report No. 23/264

The euro area economy "has shown remarkable resilience" after Russia’s invasion of Ukraine and "the largest terms of trade shock in several decades," supported by a swift policy response and a strong rebound in contact‑intensive services.
Growth is expected to "pick up gradually throughout 2023 and 2024," supported by:
- a recovery in real incomes amid continued tight labor market conditions;
- a further easing of supply constraints;
- firmer external demand;
- even as financial conditions continue to tighten.
Headline inflation "has fallen sharply recently after reaching record high levels," but core inflation "is proving more persistent."
As tight financial conditions restrain demand and supply shocks dissipate further, inflation is projected to "decline further but is expected to remain elevated for an extended period."

Downside risks:
- Renewed supply shocks (for example, from an escalation of the war in Ukraine) or a related increase in commodity prices would push up inflation and hurt growth.
- A further intensification of geoeconomic fragmentation would also raise inflationary pressures and weaken growth.
Upside scenarios:
- The economy could prove more resilient than expected, notably given a still large stock of excess savings.

Past response: a "swift policy response" helped absorb the shock from the invasion and terms‑of‑trade disruption.
Monetary and financial conditions:
- Monetary tightening and tighter financial conditions are already restraining demand.
- Persistent core inflation may require continued policy attention even as headline inflation falls.
Fiscal and structural considerations:
- Recovery in real incomes and tight labor markets are key channels supporting demand.
- Further easing of supply constraints and stronger external demand are important for the gradual pickup in growth.