Washington DC, 29 April 2023 (TDI): IMF made its Regional Economic Outlook on Europe public in April 2023. The report is titled “Europe’s Balancing Act: Taming Inflation without a Recession.”
The report divides Europe into three categories, advanced European economies, Emerging European Economies, and emerging European economies, excluding Turkiye and conflict countries (Ukraine and Russia).
Europe was hit hard by the economic impact of Russia’s invasion of Ukraine after the pandemic. Growth slowed down drastically, inflation rose, and financial stress materialized.
Forecast
As a result of decisive policy action, most economies narrowly avoided a recession this winter. Growth in Europe’s advanced economies will slow to 0.7 percent in 2023 from 3.6 percent last year.
The emerging economies(excluding Turkiye, Russia, and Ukraine) will sharply decline to 1.1 percent in 2023 from last year’s 4.4 percent.
Russia’s invasion of Ukraine led to a contraction of Ukraine’s GDP of approximately 30 percent in 2022. The baseline projection is for GDP to remain about flat in 2023.
Russia’s economy has proven to be more resilient to sanctions than many observers initially expected. After a sharp drop in the second quarter of last year, the economy bounced back strongly in the third and fourth quarters, limiting the 2022 drop in output to 2.1 percent. The momentum from the second half of last year is carried over to this year, with growth projected at 0.7 percent.
The recent earthquake has had macroeconomic impacts on Turkiye. The staff’s baseline assumes that the earthquakes will add a combined 2.7 percent of GDP to the fiscal deficit in 2023–24.
Way Forward
Europe now faces the difficult task of sustaining the recovery, defeating inflation, and safeguarding financial stability.
Inflation Risks
Inflation could stay higher for longer. The two back-to-back COVID and energy crises have damaged Europe’s productive capacity and further heightened inflation risks.
Persistently higher energy prices will durably reduce euro area output. Faster wage gains would make underlying inflation more persistent.
Tighter Monetary Policy
Amid rising interest rates, European banks faced financial stress in early 2023. Stock prices, default insurances, and secondary market rates for selected bank debt suffered setbacks.
However, vulnerabilities exist, including unrealized losses, asset quality, and feedback loops with nonbank financial institutions (NBFIs).
While there has been important progress, the financial system could be strengthened further.
With such uncertainty, central banks should maintain tight monetary policy until core inflation is unambiguously on a downward path back to central bank inflation targets.
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