In 2023, Western economies outperformed predictions, offering a ray of hope amid a turbulent world atmosphere.
Nevertheless, the outlook optimism is moderated by ongoing uncertainties, as consultants warn challenges persist, particularly regarding inflation and the European cost-of-living disaster, suggesting that essentially the most difficult occasions should still lie forward.
The European economic system has encountered headwinds this yr, grappling with a excessive price of residing, weak exterior demand, and financial tightening, resulting in a notable lack of progress momentum.
As rates of interest stubbornly maintain their floor, remaining “higher, for longer,” issues are mounting over the potential ache this might inflict on corporations and customers alike.
One of the crucial questions echoing by way of monetary corridors is whether or not the worst is behind Europe on inflation and the cost-of-living disaster.
“Inflation in the region has been primarily driven by increased energy costs and subsequently, rising food prices. November brought some relief as inflation unexpectedly dropped to 2.4%, marking the lowest point in over two years,” in accordance with Cevat Giray Aksoy of King’s College London, who additionally serves as affiliate director of analysis on the European Bank for Reconstruction and Development (EBRD).
However, Aksoy added, this decline is attributed to a lower in power costs, partially offset by the continual upward pattern in meals costs.
“Despite this relief, the cost of living in real terms remains nearly 20% higher than the pre-inflation surge levels of three years ago. It seems premature to declare an end to the cost-of-living crisis,” he underlined.
“Looking ahead to the first half of 2024, economic activity weakness could further accelerate the decline in inflation. This will mean that monetary policy will remain tight for a relatively short period. I anticipate that this could prompt the European Central Bank (ECB) to consider a reduction in interest rates as early as the first half of next year,” he underlined.
Early to say overcome inflation
During an occasion by the Economic and Social Research Institute (ESRI), Philip Lane, chief economist of the ECB, additionally cautioned that it’s early to declare inflation overwhelmed.
Anticipating a surge in headline inflation all through the euro space in December, he foresees it persisting above the ECB’s 2% goal all through 2024.
Lane acknowledged that whereas the power value shock and post-coronavirus bottlenecks are prior to now, the continual rise in wages, significantly within the providers sector, stays a major issue.
He emphasised that regardless of some constructive indicators, the continuing progress in wages and the absence of uniform disinflation within the providers business counsel that it’s not but time to declare victory over inflation. Looking forward to the ECB’s upcoming rate-setting assembly in January, Lane emphasised the necessity for a cautious method.
Throughout the yr, the ECB directed its consideration towards tackling essentially the most elevated ranges of inflation noticed in 4 a long time, primarily by way of the implementation of stringent financial coverage measures.
In a current speech, ECB President Christine Lagarde additionally posed the query, “Should we lower our guard?”
“We contemplate that query. The answer is a resounding no. We absolutely should not lower our guard,” she mentioned.
Despite feeble macroeconomic prospects, European banks face ongoing dangers attributable to extra restrictive financing circumstances.
While the swift rise in rates of interest has initially enhanced total profitability for banks, this constructive impression is predicted to wane as greater rates of interest are transferred to depositors, in accordance with the ECB.
According to the European Commission’s Autumn Forecast, following strong growth all through most of 2022, actual gross home product (GDP) contracted in the direction of the tip of 2023 after barely rising in any respect within the first three quarters of the yr.
“Still high, though declining, inflation, and tightening monetary policy took a heavier toll than previously expected, alongside weak external demand,” the report mentioned.
The Autumn Forecast revises down the EU GDP progress projections for 2023 to 0.6% for each the bloc itself and the euro space, reflecting a 0.2 proportion level discount from the fee’s summer time estimates. However, regardless of these challenges, the report means that financial exercise is poised to regularly get better.
While some constructive indicators have emerged, the EU economic system grapples with persistent challenges, pushing policymakers to undertake a cautious stance within the face of ongoing uncertainties. The specter of inflation and the cost-of-living disaster looms massive, demanding a fragile stability between financial restoration and prudent financial measures.
Source: www.dailysabah.com