The sluggish pace of economic growth in parts of Europe could turn into recession across the continent, as energy disruption threatens economic hardship and the cost-of-living crisis adds to social tension, the IMF warned on Sunday.
The IMF’s Regional Economic Outlook on Europe comes as countries grapple with high inflation and a worsening energy crisis, which has reduced households’ purchasing power and raised business costs. The new support from the authorities “only partially” compensates for this tension, the Fund said.
Russia’s invasion of Ukraine this year sent inflation soaring as energy prices soared, forcing the European Central Bank to raise interest rates at the risk of causing a contraction.
“The European outlook has turned considerably bleak, with growth set to slow sharply and inflation to remain high,” the IMF said in its report.
The Fund predicts that Germany and Italy will enter recession next year, becoming the first advanced economies to shrink after the war on Europe’s eastern flank.
Growth in Europe’s advanced economies is expected to fall sharply to 0.6% in 2023, according to the report released on Sunday. For emerging economies in the region, excluding countries in conflict and Turkey, growth is also expected to decline, to 1.7%, while losses in countries in conflict will be large.
“A key near-term risk is a greater disruption of energy supplies, which, combined with a harsh winter, could lead to gas shortages, rationing and deeper economic suffering,” warns the IMF. Inflation could also remain high for longer, and social tension could worsen due to rising costs, he adds.
Under current circumstances, central banks should continue to raise interest rates, says the IMF, which calls for “faster increases” in advanced economies. Those carrying out policies have to “walk a fine line” between fighting inflation and supporting vulnerable households and businesses during the energy crisis, the Fund points out.
