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Europe in ‘polycrisis’: 2023 marked by stagflation – Deutsche Bank

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Europe in ‘polycrisis’: 2023 marked by stagflation – Deutsche Bank By Investing.com

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Economy 10 minutes ago (Dec 12, 2022 13:16)

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By Alessandro Albano

Investing.com — In 2022, despite the war in Ukraine, growth in Europe responded well, but the outlook is decidedly gloomier. This is what Deutsche Bank writes in its latest report focusing on Europe, in which it warns of a “double-dip recession” in 2023, that “has likely begun in Q4’22.”

By a double recession, or double-dip recession, the German bank means a contraction in which the euro area briefly emerges from the recession caused due to energy shocks “before succumbing to renewed contraction again later in 2023 as the economic headwinds mount.” Adding to this is a second possibility that the euro area “swaps an immediate recession for a recession later in 2023.”

In general, DB explains, 2023 will be characterized by stagflation with a recession between the fourth quarter of this year and next quarter driven mainly by the energy crisis and its effects on growth, real income, and confidence about the business environment.

However, according to the bank, the current shock is showing itself to be “shallower and milder than feared,” with the euro area’s GDP forecast for 2023 revised upward to -0.6% from -1.2%, which is linked to a reduction in estimates for 2024 to +1% from the previous +1.4% forecast in September.

The German bank stresses that inflation remains the “key concern.” It says that the energy crisis caused by the war in Ukraine “is only partly to blame” and, “the after-effects of the pandemic, including the massive stimulus, are relevant too” as that increased the money supply in circulation.

According to DB’s experts, overall inflation is expected to fall “only moderately” in 2023 (7.1% expected vs. 8.5% previously), while core inflation (4.7% vs. 3.9%) and wage growth (5% vs. 4.3%) will be higher than forecast.

The bank further explains, “A convincing peak in underlying inflation is unlikely before end-summer. The risk is even higher and more persistent inflation.”

Linked to this is the ECB chapter, which will decide on the path of interest rates this Thursday. According to Deutsche Bank, Frankfurt is entering “the second stage of monetary exit”: the first phase, the report points out, was represented by the start of hikes to quickly reach neutrality. The second, however, “is a downshifting in pace as rates go above neutral and balance sheet consolidation begins.”

However, a slower pace of hikes does not equate “to a lower terminal rate,” which, according to DB, will touch 3% in the middle of the second quarter of 2023.

“We expect rates to remain at 3% from mid-2023 to mid-2024 (real policy rates will rise further as inflation declines), then gradual cuts back to neutral by late 2025 while QT continues,” the bank warns.

To define the context in which Europe finds itself, Deutsche Bank coins the term “polycrisis,” signifying “interacting crisis of different origins whose costs are greater than the sum of their parts.”

Elements that could add volatility in 2023 include “Russia finding ways to escalate tensions and disrupt economies; monetary tightening straining the economic and financial system; cost-of-living crises triggering social tensions, industrial action and political instability; and climate change stressing energy systems, economic production, and food chains,” Deutsche Bank’s report concludes.

(Translated from German)

Europe in ‘polycrisis’: 2023 marked by stagflation – Deutsche Bank

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