{
  "title": "The European Outlook and Policymaking: Seeing Off Inflation and Pivoting to Longer-Term Reforms",
  "publication": "IMF News, October 18, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/10/18/sp-laura-papi-remarks-at-budapest-economic-forum",
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  "summary": "Good morning to all of you. Thank you for the introduction. It is a pleasure to be here today and for the first time at the Budapest Economic Forum. I am honored to have been invited to speak. Today, I will discuss the outlook for Europe and how we see the risks.",
  "authors": [
    "Laura Papi"
  ],
  "publishDate": "2023-10-18",
  "sections": [
    {
      "heading": "Overview and key takeaways",
      "content": "- Progress has been made in taming inflation and the likelihood of a soft landing has increased, both globally and in Europe.\n- Downside risks remain significant: risk of persistent and more volatile inflation, greater shock propensity, slowdown in productivity growth, geoeconomic fragmentation, and challenges of the green transition.\n- Hungary faces a difficult macroeconomic environment, with still-high inflation and the longest recession since the mid-1990s."
    },
    {
      "heading": "Outlook and near-term challenges",
      "content": "- IMF baseline forecast:\n  - Europe as a whole: 2023 growth will be 1.3 % (2,7 in 2022), picking up to 1.5% next year.\n  - Advanced economies: from 0.7 % to 1.2%.\n  - Emerging European Economies: recovery from about 1 to about 3 %.\n- Recent drivers moderating inflation: easing commodity prices and supply constraints; monetary tightening has cooled headline inflation and supported real wages.\n- Divergences across countries: energy-intensive and manufacturing-oriented economies (e.g., Germany and Hungary) are performing less well.\n- Inflation dynamics and labor markets:\n  - Headline inflation is falling but not expected to return to target until 2025 in many countries, for some even 2026.\n  - Core inflation has been persistently high in many European economies, especially in services.\n  - Nominal wages are growing rapidly; in some economies wage growth outpaces inflation, especially in Eastern Europe.\n  - Vacancy to unemployment ratios stand at record highs and unemployment rates at record lows in most of Europe.\n  - Risk of wage-price spiral: unlikely in advanced European economies, but non-negligible in Eastern Europe.\n- Historical price shock:\n  - As the pandemic and Russia’s war in Ukraine hit European economies, in only 2 years prices increased by 25 percent, as much as over the 5 years following the global financial crisis.\n  - Hungary: inflation reached 25 percent at end- 2022, and prices have increased by 41 percent cumulatively from end-2020 to August 2023.\n- Firm-level margins: firms passed on more than input cost increases to consumers in many countries; profits rose in CESEE and have started to fall—creating potential to absorb some wage increases but with no guarantee.\n- Structural inflation risk from geoeconomic fragmentation:\n  - Greater fragmentation can cause commodity price spikes, more trade restrictions, supply-chain disruptions and persistent negative supply shocks that are inflationary.\n  - Pre-pandemic assumptions that central banks could ignore supply shocks have been challenged."
    },
    {
      "heading": "Medium-term challenges",
      "content": "- Declining medium-term growth prospects: per capita growth has fallen since the 2008 global financial crisis; output scarring from the pandemic and the energy crisis.\n- Major structural shifts: fragmentation, climate and technological change, demographic pressures.\n- Economic costs of fragmentation (estimates cited):\n  - Greater international trade restrictions could reduce global economic output by up to 7 percent over the long term, or some $7 trillion in today’s dollars.\n  - Adding technological decoupling could lead some countries to see losses of up to 12 percent of GDP.\n  - Segmentation in commodities trade could erase 2 percent from global GDP and up to 3.5 percent from that of emerging Europe.\n- Reshoring/near-shoring may present opportunities only if cost competitiveness—especially wages—is preserved.\n- Climate transition challenges:\n  - Rapid temperature rises and more frequent natural disasters increase urgency for a greener, climate-resilient economy.\n  - Short-term adjustment costs and uneven benefits across countries, firms, and people; effects on prices and growth uncertain depending on the orderliness of adjustment.\n  - Auto sector example: transition to electric vehicles is already negatively affecting employment in regions focused on internal combustion engine vehicle production; the auto industry employs 7 percent of the European workforce.\n- Labor supply and capital constraints: demographic trends constrain labor supply; capital stocks in emerging Europe remain low."
    },
    {
      "heading": "Policy recommendations and priorities",
      "content": "- Monetary policy\n  - Critical not to loosen policies prematurely in response to temporary declines in inflation; evidence from 100 inflation shocks shows premature easing often led to reaccelerating inflation.\n  - Monetary policy should remain restrictive until:\n    - there is clear evidence of a substantial improvement in the core inflation forecast;\n    - there is a reduction of upward inflation risks (hinging mainly on labor market developments);\n    - and there is absence of upward movements in inflation expectations.\n  - Calibration should be country-specific; some central banks may keep rates at current levels while others may need to raise them further.\n  - Note: Hungary has now one of the highest real policy rate in Europe.\n  - Fighting inflation now reduces future sacrifice in growth and employment; in emerging markets bringing down sticky inflation can be very costly and creates competitiveness problems.\n- Fiscal policy\n  - Strong recommendation: all countries should step up efforts to rebuild fiscal buffers while protecting the vulnerable—consolidation should start now, especially in high-debt and high-deficit countries.\n  - Fiscal consolidation complements monetary policy and rebuilds space for future shocks and productivity-enhancing investments, including green infrastructure.\n  - Revenue mobilization and expenditure efficiency:\n    - IMF research: potential for revenue mobilization by increasing tax efficiency in emerging European economies is as high as 2 percent of GDP, on average.\n    - Opportunities to eliminate tax leakages, exemptions, inefficiencies.\n    - Many countries maintain costly and counter-productive energy subsidies that should be eliminated and replaced with targeted support at a fraction of current cost.\n  - With high global yields, governments should rigorously prioritize public spending.\n- Structural policies\n  - Supply-side reforms to stimulate business dynamism, encourage investment and R&D, and remove barriers to economic innovation.\n  - Improve worker training, skills, and active labor market policies to ease transitions and prevent employment losses during the green and digital transitions.\n  - Boost labor participation to counter demographic trends and relieve labor market tightness and inflation pressures.\n  - In emerging Europe, priorities include strengthening public governance, enhancing skills and infrastructure, and investing in human capital to reduce emigration and attract inward investment.\n- Industrial policy and fragmentation\n  - Industrial policies can address market failures and externalities (critical infrastructure, basic research) but must be narrow and careful.\n  - Avoid costly subsidy races, distortionary tariffs; coordinate policies multilaterally to avoid beggar-thy-neighbor outcomes.\n  - For the EU: complete the single market (single services market, banking union, capital markets union) and ensure green subsidies maintain the integrity of the EU’s Single Market and follow a common EU approach.\n  - Implement Recovery and Resilience Plans to boost EU productivity and competitiveness.\n  - Energy importers should diversify suppliers to avoid overdependence.\n- Climate policy\n  - International collaboration on climate change, including a global carbon price floor, will reduce emissions and complement domestic policies.\n  - IMF Fiscal Monitor proposes a mix of feasible policies: feebates, green subsidies, regulation standards, combined with transfers to vulnerable workers."
    },
    {
      "heading": "Conclusion",
      "content": "- Tackling inflation now will strengthen resilience and competitiveness in the long term.\n- Bringing inflation under control and rebuilding fiscal space will allow European policymakers to seize opportunities from big transitions rather than be casualties of structural shifts.\n- Structural policies that boost supply—especially at the EU level—are the only sustainable way to raise growth and alleviate structural inflation pressures, supporting convergence for emerging economies like Hungary.\n- The IMF remains committed to supporting the region to foster macroeconomic stability and higher living standards.\n\nLaura Papi, Deputy Director, European Department, IMF — Remarks at the Budapest Economic Forum, October 18, 2023\n\n---\n\n Content in this bundle\n\n- European Economic Outlook and Policymaking: Seeing Off Inflation and Pivoting to Longer-Term Reforms\n  - European Economic Outlook and Policymaking: Seeing Off Inflation and Pivoting to Longer-Term Reforms (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - European Economic Outlook and Policymaking: Seeing Off Inflation and Pivoting to Longer-Term Reforms (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- Hungary and the IMF\n- Speeches\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2023/10/18/sp-laura-papi-remarks-at-budapest-economic-forum"
    }
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    "Authors: Laura Papi",
    "Published: October 18, 2023",
    "Progress has been made in taming inflation and the likelihood of a soft landing has increased, both globally and in Europe.",
    "Downside risks remain significant: risk of persistent and more volatile inflation, greater shock propensity, slowdown in productivity growth, geoeconomic fragmentation, and challenges of the green transition.",
    "Hungary faces a difficult macroeconomic environment, with still-high inflation and the longest recession since the mid-1990s.",
    "IMF baseline forecast:",
    "Recent drivers moderating inflation: easing commodity prices and supply constraints; monetary tightening has cooled headline inflation and supported real wages.",
    "Divergences across countries: energy-intensive and manufacturing-oriented economies (e.g., Germany and Hungary) are performing less well.",
    "Inflation dynamics and labor markets:",
    "Historical price shock:",
    "Firm-level margins: firms passed on more than input cost increases to consumers in many countries; profits rose in CESEE and have started to fall—creating potential to absorb some wage increases but with no guarantee.",
    "Structural inflation risk from geoeconomic fragmentation:",
    "Declining medium-term growth prospects: per capita growth has fallen since the 2008 global financial crisis; output scarring from the pandemic and the energy crisis.",
    "Major structural shifts: fragmentation, climate and technological change, demographic pressures.",
    "Economic costs of fragmentation (estimates cited):",
    "Reshoring/near-shoring may present opportunities only if cost competitiveness—especially wages—is preserved.",
    "Climate transition challenges:",
    "Labor supply and capital constraints: demographic trends constrain labor supply; capital stocks in emerging Europe remain low.",
    "Monetary policy",
    "Fiscal policy",
    "Structural policies",
    "Industrial policy and fragmentation",
    "Climate policy",
    "Tackling inflation now will strengthen resilience and competitiveness in the long term.",
    "Bringing inflation under control and rebuilding fiscal space will allow European policymakers to seize opportunities from big transitions rather than be casualties of structural shifts.",
    "Structural policies that boost supply—especially at the EU level—are the only sustainable way to raise growth and alleviate structural inflation pressures, supporting convergence for emerging economies like Hungary.",
    "The IMF remains committed to supporting the region to foster macroeconomic stability and higher living standards.",
    "**European Economic Outlook and Policymaking: Seeing Off Inflation and Pivoting to Longer-Term Reforms**",
    "[Hungary and the IMF](http://www.imf.org/external/country/HUN/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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