The president of the European Central Bank (ECB), Christine Lagarde, said on Monday that she expects economic activity in the euro zone “to slow down substantially in the coming quarters”, due to various factors, starting with inflation, “which remains too tall”. .
Addressing the European Parliament’s Economic and Monetary Affairs Committee in Brussels, Lagarde began by commenting that “Russia’s unjustified war of aggression against Ukraine continues to cast a shadow over Europe” and assumed that “the prospects are increasingly bleak”, warning that “The situation is expected to get worse before it gets better.”
After noting that “the eurozone economy grew by 0.8% in the second quarter of 2022, mainly due to strong consumer spending on services as the economy reopened”, the ECB president also pointed out that “the economies with large tourism sectors benefited especially as people traveled more during the summer,” and “the still strong labor market also continued to support economic activity.”
However, he warned then, the ECB expects “activity to slow down substantially in the coming quarters”, and pointed to “four main reasons” for this projection, the first of which is “high inflation”, which in August reached 9.1%. in the single currency space, and that it is “weakening spending and output across the economy”, a phenomenon exacerbated “by gas supply disruptions”.
Lagarde pointed, secondly, to the fact that “the strong demand for services that came with the reopening of the economy is running out of steam”, thirdly, “the weakening of global demand, also in the context of a monetary policy more restrictive in many large economies”, and, finally, the fact that uncertainty remains high, “which is reflected in the drop in family and business confidence”.
The president of the ECB has stressed that “the increase in energy and food prices is weighing especially on the most vulnerable families and the situation is expected to get worse before it gets better”.
“These events have led to a downward revision of the latest economic growth projections for the rest of the current year and through 2023. ECB officials now expect the economy to grow by 3.1% in 2022, down 0, 9% in 2023 and 1.9% in 2024,” he said.
Along the same lines, he continued, the ECB’s inflation projections were revised to a “significant rise”, now forecasting annual inflation of 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024 , with the risk that these values will be even higher.
“Risks to the inflation outlook are mostly to the upside, primarily reflecting the possibility of further major disruptions in energy supply. While these risk factors are the same for growth, their effect would be the opposite: they would increase the inflation, but they would reduce growth,” he warned.
Lagarde argued that, “in this environment, it is essential that the budget support used to protect these families from the impact of higher prices be temporary and targeted”, arguing that this “limits the risk of fueling inflationary pressures, also facilitating the task of monetary policy to ensure price stability and help preserve debt sustainability”.
In its last two meetings, the ECB raised interest rates by 125 basis points in total, the largest increase in its history, and today the president of the institution warned that further increases are expected in the next meetings.
“In the current situation, we expect to raise interest rates further during upcoming meetings to curb demand and avoid the risk of a persistent upward shift in inflation expectations. We will periodically reassess our policy trajectory in light of the information received and the evolution of the inflation outlook”. Our future policy decisions will continue to be data-driven and follow a meeting-by-meeting approach,” she said.
Source: TSF
