diagnosis European Central Bank Expectations for the Eurozone economy continue to dim. guiding entity Christine Lagarde He warned this Monday that economic activity will continue to slow “significantly” in the coming months. In this context, and with limited wage dynamics, the ECB chief said that “a certain recovery is likely to offset the resilience of labor markets and rising inflation, accelerating wage growth.
inside that third hearing this year before the economic affairs commission European ParliamentLagarde reiterated the good results of the economy in the first half of the year thanks to strong consumer spending on services as the economy reopens, good performance of the tourism sector and a still strong labor market. Despite this evolution, activity will slow “significantly in the coming quarters”. According to the ECB, the main reasons for this are high inflation, which hampers economy-wide spending and production, as well as cuts in gas supply.
In addition, the strong demand for services that emerged with the reopening of the economy weakened. In addition, weakening global demand and worsening terms of trade in the context of tighter monetary policy in most major economies will mean less support for the euro area economy. And finally, the high uncertainty that has shaken the confidence of households and companies. All this led to revise down The latest economic forecasts for the Eurozone: 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024 in the reference scenario. “There is still uncertainty about the budget response, so it is very difficult to predict a result in 2023. But it will be a very difficult year,” Lagarde said.
More rate hikes
Even so, the ECB’s intention is to continue raising interest rates at subsequent board meetings – already rising 0.5 in July and 0.75 in September – to continue softening the rise in inflation. In the current situation, we expect to increase the interest rates further in the coming meetings in order to curb demand and protect ourselves from the risk of continuous upward changes in inflation expectations.” meeting in October. “As the level of uncertainty is very high, we will decide to meet after meeting and decide based on the data presented to us,” he said.
He insisted that was the answer, although he acknowledged that he was aware of the impact of the European currency rate hikes. “We’re very aware that mortgage loans are very high, but that’s what we have to do,” he said during his discussion with MPs. Lagarde reminded that inflation reached a record level of 9.1% last August. He also explained that energy and food remain the main drivers, although pressure on prices has spread to more sectors, in part due to the economy-wide impact of higher energy costs.
triggered inflation
According to the projections that ECB experts are working on, annual inflation will be 8% in 2022, 5.5% in 2023, and 2.3% in 2024, still above the 2% reference target. “The risks to the inflation outlook are primarily to the upside, reflecting the possibility of further major disruption to energy supply. While these risk factors are the same for growth, the effects will be the opposite: They will increase inflation but reduce growth,” Lagarde predicts.
In his speech, the ECB President also touched upon the measures to combat fragmentation. Transmission Protection Tool Last July, a new anti-crisis tool was announced, which aims to “compete erratic and unfair market dynamics with sufficient flexibility to respond to the severity of the risks posed by policy transmission”. Although they asked him about its possible use with Italy, he said he didn’t have “a specific country in mind” and the idea was to “guarantee an adequate transmission to all countries in the eurozone”. To achieve this, they will need to meet four criteria: compliance with the budgetary framework, absence of significant imbalances, sustainability of the budget, and sound and sustainable macroeconomic policies.