On the eve of the first anniversary of Russia’s invasion of Ukraine, the conflict shows no sign of resolution. In contrast, on the European economic front, the news is better than expected.
While a recession seemed inevitable just a few months ago, this prospect has receded, according to the International Monetary Fund (IMF), which has just updated its economic forecasts.
Eurozone countries have weathered conflict-induced shocks better than expected, according to the IMF. The growth of the gross national product of the 19 countries of the monetary union ended the year 2022 on positive ground. GDP is up 0.1% in the fourth quarter, which is not much, but still better than expected.
According to preliminary statistics just published by Eurostat, the official statistical agency, Germany, the zone’s largest economy, ended the year in the red, while France, Spain and Portugal are remained on positive ground.
Better than expected
European economies therefore withstood the end of Russian gas, the explosion in energy prices and the resulting double-digit inflation. If the sky has cleared up, it is largely thanks to the measures taken by governments to mitigate the rise in energy prices on the financial situation of households and also because the price of energy has fallen considerably over the of the last few months.
The reference gas price on the European market has returned to its level of December 2021, before the start of the conflict. The price of oil is also down sharply, with a barrel of Brent worth less than US$80.
Inflation is starting to show signs of easing, which bodes well for the future. The year 2023 promises to be better than what was expected not so long ago. Europe could escape recession, according to the IMF, which raised its growth forecast for Europe slightly from 0.5% to 0.7% for the current year.
“There are a lot of risks, but our baseline scenario is that the eurozone will not be in recession this year,” Petya Koeva Brooks, deputy director in the IMF’s research department, told Euronews.
A growth of 0.7% is not, by historical standards, a large number. But we also expect things to pick up and the outlook to be better in 2024.
Petya Koeva Brooks, Deputy Director in the IMF’s Research Department
If Europe avoids the decline, it should be the same for all industrialized countries, predicts the IMF. All but one. The UK is the only country set to suffer a recession in 2023, defeated by the impact of Brexit, rising energy prices and general inflation. Despite repeated interest rate hikes, inflation was still above 10% last December, which is higher than anywhere else in the G7 countries.
Inflation remains a concern
The inflation rate is still high in the euro zone as well, at 8.5% according to preliminary figures for January. But the improvement in economic conditions, however modest, leaves more leeway for the European Central Bank (ECB) to continue to fight rising prices.
Under the leadership of Christine Lagarde, the ECB took time to initiate monetary tightening in the euro zone. Before the first hike, last July, the European key rate was below zero. The first hike was followed by four others, the most recent of which, last week, took the key rate to 2.25%.
Another increase of 50 basis points is announced in March. Contrary to what is happening on this side of the Atlantic, there is no pause in sight in the fight against inflation.
And it’s for the best, according to the IMF, which warns the monetary authorities against the temptation to declare victory too soon.
“Central banks need to signal that interest rates need to stay higher for longer, until inflation including wage and price increases in the services sector is back on target. »
Rate hikes will dampen European growth and could increase the likelihood of a recession. On this front too, the war is not over.