Nov 7, 2023
Europe Faces Soft Landing With High Rates Still Needed, IMF Says
, Bloomberg News
(Bloomberg) -- Europe’s economy is unlikely to crash — even as a more-than yearlong bout of interest-rate increases tames inflation, according to the International Monetary Fund.
“The outlook for Europe is for a soft landing, with inflation declining gradually,” the Washington-based lender said Wednesday in a report, predicting growth in gross domestic product in the wider region will slow to 1.3% in 2023, improving slightly to 1.5% in 2024.
It warned, though, that returning consumer prices to normal levels — after they spiked following Russia’s attack on Ukraine and triggered the steepest hikes in rates of the euro era — may take several years.
“Maintaining a restrictive monetary-policy stance is thus paramount to securing the return of inflation to target within a reasonable timeframe,” the IMF said. “Uncertainty about inflation persistence is large, and the cost of easing too early is substantial.”
Central banks in Europe have hiked borrowing costs at unprecedented speeds to tame inflation, with the impact increasingly being felt across economies. Output in the euro zone shrank 0.1% in the third quarter, and analysts expect a similar outcome in the UK when data are released on Nov. 10.
While rising wages are aiding Europe’s economic recovery, they also risk stoking further inflationary pressures — especially if they aren’t matched by improvements in productivity, the IMF said. Structural factors such as an aging society and a preference for shorter work weeks, meanwhile, mean employers are facing more fierce competition in attracting workers.
Such risks are especially pronounced in Europe’s emerging economies, where pay has increased at a faster pace than in more advanced parts of the region, according to the report.
“There is a fine line between aiding economic recovery and banishing stubbornly high inflation,” the IMF said. “Central banks must watch for upside risks to inflation and closely monitor wage settlements and their consistency with productivity trends. A marked divergence would be worrisome.”
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