Danske Research Team
Danske Bank A/S
The economic challenges facing the euro area are not the same as in the US. Supply side shocks set the scene for an extended period of high inflation coupled with lacklustre growth. A recession seems difficult to avoid and we expect GDP to decline by 0.9% in 2023, followed by stagnation in 2024.
Elevated inflation pressures coupled with the risk of de-anchoring inflation expectations will keep the ECB firmly in tightening mode. Rate cuts could be on the cards in 2024, but uncertainty remains high.
Europe’s biggest fragility stems from the (geo) political front, as well as a renewed flaring up of the energy crisis or new Covid-19 outbreaks next winter. Upside risks to the growth outlook arise from pandemic-related private savings buffers, fiscal measures and accelerated investment spending.
‘Stagflation’ does not have to be the new normal, but structural reforms to address low productivity and adverse demographic trends as well as securing a leading position in the green transition race remain key.
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