A recession is emerging for 2023 in the euro zone, according to the European Central Bank

A recession is looming for 2023 in the euro zone, according to the European Central Bank

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Economic activity in the euro zone is likely to slip into recession in 2023 amid prolonged war in Ukraine, two senior European Central Bank (ECB) officials said on Friday. 

“Growth prospects are mainly on the downside, in particular due to the economic consequences of the war in Ukraine”, explained ECB President Christine Lagarde in a speech before the Committee International Monetary and Financial Fund (IMFC), the policy arm of the IMF.

If the former boss of the IMF does not utter the word recession, she stresses that “the outlook has darkened” since this summer due to “high inflation”, which reached 10% in September in the euro zone.< /p>

“The decrease in the effects of reopening (post Covid-19 crisis)”, “the weakening of global demand” and “the drop in confidence” also weigh.

These factors “are likely to cause a significant slowdown in euro area GDP growth in the second half of and early 2023,” she adds.

There are supports for the economy, however, such as the level of accumulated household savings, a robust labor market and budgetary supports including the European recovery plan, according to Ms. Lagarde.

Downside scenario

The ECB set out in September several assumptions for euro area growth in 2023 and “what we considered to be our downside scenario (…) approximates the basis,” Luis de Guindos said Friday in an interview with the Lithuanian daily Verslo Zinios. 

In the downside scenario, gross domestic product in the eurozone would contract by nearly 1% next year, while the baseline projects growth of 0.9%.

The difference “is in the evolution of energy supplies from Russia”, reminded Mr de Guindos. 

In the base case, 20% of energy deliveries would continue to be provided, against a total blackout in the worst case, which is now the most clearly envisaged scenario. 

To sum up, the eurozone faces “a very difficult combination of weak economic growth, including the possibility of a technical recession, and high inflation,” according to Mr. de Guindos. 

Before the recession materialized, the ECB started to tighten rates abruptly in July, as it was obsessed with bringing inflation back to the 2% target. 

The next meeting of the institution's board of governors, scheduled for October 27, could result in a further 0.75 point hike in key rates, as in September, according to statements by eurozone bankers and observers. /p>

Between weaker economic growth, higher inflation and tighter financing conditions, all of this means that “the outlook for financial stability has deteriorated” putting “pressure on the capacity debt service for businesses and households”, also warned naked Mrs. Lagarde.