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IMF: Middle East Conflict Could Drive Up Inflation in Europe

During a media conference in Brussels, Alfred Kammer, the Director of the European Department at the IMF, said in his opening remarks that inflation could surprise on the upside.

“The Israel – Gaza conflict has already impacted energy prices, which could drive up inflation in Europe more generally,” he said at the meeting to coincide with the publication of the IMF’s new Regional Economic Outlook report for Europe.

Euronews asked Mr Kammer to further expand on the potential economic impact, including on oil and gas prices in Europe.

“If it continues as we see, the impact will remain limited on Europe. On the pricing side with energy prices, something has realised but not in a dramatic fashion,” he added.

At the time of writing on Tuesday 7 November, Brent crude was trading down 3.05% at $82 a barrel, while US crude oil was down 3.17% at $78 a barrel, far off the $100 levels seen in February and March 2022 after the Ukraine-Russia conflict began.

As such, the pricing side continues to be carefully watched by investors due to the implications of potential rising oil prices on the fight against inflation. 

“Flat growth” in 2023 and a “lacklustre recovery” in 2024

During the meeting in Brussels, Mr Kammer was also asked about the possibility of a technical recession in the eurozone.

“We are not foreseeing a recession in the eurozone in our projections. We see flat growth during 2023 and a lacklustre recovery in 2024.”

He also noted how the continent has overcome the COVID-19 pandemic and weathered the war-inflicted energy shock better than expected.

“Growth is slowing this year, in part reflecting central banks having raised interest rates to fight high inflation triggered by the energy and food price shocks. There has been success on the inflation front and most of Europe is not expected to fall into recession,” he said.

Mr Kammer further noted headwinds to economic growth, including the geo-economic fragmentation and high energy prices.

“These add to older headwinds – from low productivity growth and an ageing workforce. The green and digital transitions pose additional challenges. All of this comes as fiscal buffers have been drained,” he added.

Regional Economic Outlook for Europe

These challenges form the main topics in the IMF’s new Regional Economic Outlook for Europe, published on Wednesday 8 November.

“The outlook for Europe is for a soft landing, with inflation declining gradually. Growth in the region overall is expected to slow to 1.3% in 2023 from 2.7% last year, and improve to 1.5% in 2024. Within advanced European economies, service-oriented economies will recover faster than those with relatively larger manufacturing sectors, which face low external demand and are more exposed to high energy prices,” the IMF report said.

Similarly, the report found that European emerging market economies will experience a mild recovery in 2024. Still, the extent will vary across countries depending on the energy intensity of production, service sector orientation, and, especially for the easternmost countries, disruption of trade relationships with Russia.

The report also highlighted how monetary policy is approaching the end of the tightening cycle and a moderate fiscal consolidation is projected for 2023, picking up in 2024.

“Although a robust US economy is an important backstop to global demand, weaker activity in China, additional commodity price shocks, and the materialisation of financial stability risks are important downside risks to growth. Tighter monetary policy has elevated credit costs and weakened household and corporate real estate balance sheets. Even though banks’ capital buffers are healthy, they could become strained under an adverse scenario.”

Furthermore, the IMF said the projected recovery in real incomes and ‘“still-strong labour markets” will slow the pace of disinflation – and added that most countries are not expected to reach inflation targets before 2025.

“Sustained nominal wage growth above inflation and productivity growth rates is a key risk to disinflation, especially in European emerging market economies. Inflation could become entrenched, requiring additional policy tightening and potentially leading to stagflation,” the report also highlighted.

Source : Euro News Business