Europe risks ‘deeper recessions’ due to war and inflation: IMF

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Recessions in parts of Europe could turn into “deeper recessions” across the continent, as power outages threaten to cause economic damage, while a cost-of-living crisis risks stoking social tensions, the IMF said. on Sunday.

The International Monetary Fund’s Regional Economic Outlook for Europe comes out at a time when countries grapple with high inflation and a worsening energy crisis that has depressed household purchasing power and raised business costs.

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New government support “only partially” offsets these tensions, the fund said on Sunday.

Russia’s invasion of Ukraine this year spiked inflation as energy prices rose, forcing the European Central Bank to raise interest rates to cool the economy at the risk of causing a contraction.

“The European outlook has darkened considerably, with growth set to slow sharply and inflation remaining elevated,” the IMF said in its report.

The fund already predicts that Germany and Italy will slide into recession next year, becoming the first advanced economies to contract after the war on Europe’s eastern flank.

While Europe was on its way out of the pandemic late last year, the war in Ukraine “completely changed this picture,” the IMF said.

Overall, growth in Europe’s advanced economies is expected to slow sharply to 0.6 percent in 2023, according to Sunday’s report.

For emerging economies in the region, excluding conflict countries and Turkey, growth is also forecast to slow to 1.7 percent, while losses in conflict countries will be large.

“A key short-term risk is further disruption to energy supplies, which, combined with a cold winter, could lead to gas shortages, rationing and deeper economic pain,” the IMF said.

Inflation could also stay high for longer and social tensions could worsen due to rising costs, the fund added.

Under current circumstances, central banks should continue to raise policy rates, the IMF said, calling for “faster increases” in advanced economies.

Policymakers must “walk a fine line” between fighting inflation and supporting vulnerable households and businesses during the energy crisis, he said.

Earlier this month, the IMF forecast that the German economy, Europe’s largest, would contract 0.3 percent in 2023, hit hard by its reliance on Russian gas after Moscow cut off supplies to Europe in alleged retaliation for Western sanctions over the conflict.

Italy, whose industries also depend on gas imports, will see its gross domestic product contract by 0.2 percent.

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