The signs pointing to a slowdown in growth across the Euro Zone are opening a window for the region to enter a new phase of economic activity. Inflationary pressures persist, and experts expect it will take time for price pressures to ease. Isabel Schnabel, a German representative on the European Central Bank board, has highlighted several factors shaping this outlook.
There are strong indications that growth will slow, and a technical recession cannot be ruled out, especially if Russia further tightens its energy supply. Schnabel told Reuters that the risk of a weaker expansion appears to be rising and should be monitored closely. Her comments reflect concerns about the trajectory of the euro area as external shocks and internal frictions weigh on momentum. (Reuters)
In this context, downside risks to Euro Zone growth have grown as well. She cited potential supply-side disturbances from drought conditions and reduced water levels in major rivers, noting how such shocks can tighten production and logistics across the continent. The economy has shown resilience, yet the energy price shock in Germany remains a critical factor that is not likely to stabilize quickly, with substantial heterogeneity among member states. Among the largest economies, Germany appears the most affected by the current energy dynamics.
Despite the anticipated cooling of activity in the euro area, Schnabel stated that there are no clear signs of a prolonged or deep recession at this point. She admitted that a technical recession cannot be dismissed, but she did not view it as a foregone conclusion. (Reuters)
On inflation, Schnabel emphasized that price pressures are likely to persist for some time and that a rapid return to the 2 percent target is not imminent. She noted that as monetary normalization progresses, inflation may not retreat quickly and could even edge higher in the near term before easing. (Reuters)
While long-term inflation expectations for many indicators hover near the 2 percent mark, she warned that several signs point to a real risk of misalignment within markets and the economy. It is important, she argued, to treat these signals seriously and to weigh them carefully in policy considerations. (Reuters)
Given the challenge of predicting the inflation peak, Schnabel argued for greater reliance on real inflation data when evaluating the ECB’s monetary stance. The aim is to ensure policy moves reflect the true price environment rather than lagging indicators. (Reuters)
Ahead of the upcoming Governing Council meeting, Schnabel outlined a cautious but positive stance for decisive action if warranted by incoming data. The latest indicators have raised concerns seen in July when the ECB decided to raise rates by 50 basis points. She suggested that the central bank should not hesitate to respond if the data justify it, even as it remains mindful of the broader economic context. (Reuters)