Economic Research syndicated feed

The lengthy post-pandemic rebound wave is settling down, and growth normalisation is hitting another, more lasting shock from the war in Ukraine. This is an exceptional slowdown for the economy: annual growth of 5.5% in Q122 fell to 2.3% in Q3. The factor of the war's impact on the cycle. The economic downturn cannot be avoided, though, and a new growth pattern threatens to be weaker for a long time and lower than (also weaker) potential growth. We expect GDP to grow by 0.1% in 2023 and 1.1% in 2024.

Shocks and changes dominated once again in 2022. After the euphoria of 2021 and record growth, 2022 began amid price and supply pressures, thought at the time to be transitory. The invasion of Ukraine in February and the ensuing energy crisis quickly created a new challenge for Italy. As in Germany, the war in Ukraine highlighted the vulnerability of Italy's energy strategy and the country's susceptibility to soaring gas prices. 

Uncertainty will remain very high in 2023, although economic activity could demonstrate greater momentum from next spring. Throughout the year, a gradual moderation in energy and food prices is expected, as well as a very gradual reduction in bottlenecks and the economic consequences of the war in Ukraine. In addition, a more contained shift from imported inflation to core inflation will limit the negative impact of inflation on activity. Our growth forecast for 2023 is an annual average of 0.8%.

Our scenario starting in Q3-2022 includes a four-quarter recession due to the ongoing purchasing power crisis, past and future tightening, monetary and financial conditions, and the government’s fiscal turnaround. However, the cumulative decline in GDP in our scenario is relatively contained, at -1.3% between Q3-2022 and Q2-2023, driven by a 2.7% decrease in private consumption, lower than what the drop in real disposable income alone would suggest. Our annual average growth forecast for 2023 has been revised downwards (to -0.8% versus -0.2% at the beginning of October). In 2024, growth is forecast to return to positive at +1.1%, below potential. 

Although the rise in energy prices – exacerbated by the war in Ukraine – is partly cushioned by public support measures and the "tariff shield", it is negatively impacting the French economy, household's purcha-sing power and business income and its total cost in 2022 is expected to reach 1.5 points of GDP. These effects on income will lead to a slowdown in demand at the end of 2022 and early 2023, at which point a contraction in GDP is not ruled out. In total, GDP growth is expected to reach 0.3% in 2023 after 2.6% in 2022.

While there are some signs that inflation is easing, second-round effects cannot be ruled out in the coming months, threatening private consumption with a significant decline and growth with a recession of 0.5% by 2023. The sustained rise in energy consumption will also dampen the longer-term outlook for activity.

Inflation has taken solid hold – both demand-side and supply-side; both surging inflation and inflation that just edged up slightly due to the shock of the war in Ukraine. Monetary tightening is stinging – whether it is aggressive and almost complete, or more hesitant and limited. The powerful mainsprings of the post-Covid recovery are relaxing, and economies – at varying degrees of proximity – are getting ready to tangle with recession. Inflation has yet to surrender; monetary policy is set on combating it, and the recession is in focus. These are the key components in the interest rate scenario.