Regional Economic Outlook for Europe, October 2022
Regional Economic Outlook, October 2022
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- Published: October 12, 2022
Overview: conflict, energy, and macroeconomic trade-offs
- The war in Ukraine is taking a growing toll on Europe’s economies.
- The worsening energy crisis has:
- depressed households’ purchasing power, and
- raised firms’ costs,
- only partly offset by new government support.
- Central banks in the region and the world are acting more forcefully to bring high and persistent inflation down to targets.
- Global financial conditions have tightened.
- European policymakers face severe trade-offs and tough policy choices:
- A tightening macroeconomic policy stance is needed to bring down inflation, while helping vulnerable households and viable firms weather the energy crisis.
- Policies need to stay nimble and agile and adjust should additional shocks materialize.
- 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.
- Risks of medium-term output scarring, which was successfully avoided in the pandemic, are resurfacing.
- Risks:
- Risks to growth are on the downside.
- Risks to inflation are on the upside, epitomized by the energy crisis, which fosters unusually high uncertainty and steep policy trade-offs.
Chapter 1 — Inflation in Europe: assessment, risks, and policy implications
- Inflation in Europe has soared to multidecade highs.
- Drivers and empirical findings:
- Soaring commodity prices account for much of the surge in inflation.
- Empirical analysis finds that a sizable share of the recent uptick cannot be explained by conventional inflation drivers and points to the role of pandemic- and war-related forces, such as rising shortages in input markets.
- Prospects:
- The prospective stabilization of commodity prices and the projected slowdown in growth should gradually bring inflation down, but the process will likely be slower than previously expected and highly uncertain.
- Risks and central bank guidance:
- Inflation risks are on the upside.
- Central banks should thus keep raising policy rates in most European countries while remaining nimble and data-dependent.
- Fiscal guidance:
- Fiscal policies should be focused on weathering the energy price shock without adding to inflation pressures.
Policy implications and recommended stance
- Macroeconomic policy stance:
- Tighten policy to bring down inflation.
- Simultaneously help vulnerable households and viable firms weather the energy crisis.
- Operational principles:
- Remain nimble and agile.
- Be ready to adjust the policy mix should additional shocks materialize.
Regional Economic Outlook — October 2022 (IMF).
Content in this bundle
- Microsoft Word - Online annex v8
- Regional Economic Outlook: Europe -- The Fog of War Clouds the European Outlook
- Regional Economic Outlook: Europe -- The Fog of War Clouds the European Outlook
- Full Report
- Executive Summary