Eurozone – 2022-2023 Scenario: resilience against endemic Covid-19 and the supply shock
- Recent economic trends
- Focus: the link between inflation and employment
- Policy mix
The damage inflicted on the eurozone economy by the pandemic appears to be less severe than initially expected, which corroborates our outlined optimistic scenario of expansion transitioning from unusual to more normal but steady levels. The impact of the latest wave of Covid remains limited for the entire zone, thanks to its high rate of vaccine coverage. We are forecasting GDP growth of 5.2% in 2021, 4.3% in 2022 and 2.5% in 2023.
The eurozone is facing an exogenous inflationary shock against a backdrop where the negative output gap still has not been closed. Indeed, at just -0.3% away, the zone has virtually returned to its pre-crisis GDP level, but will not reach the level it projected before the pandemic until mid-2022. Despite the strength of the rebound, aggregate demand is still weak, which is consistent with the modest uptick in wages and the more persistent, albeit temporary, rise in inflation. The main risk of rising inflation is its impact on growth, as inflation erodes purchasing power, rather than on expectations that could fuel a price-wage spiral. Monetary and fiscal policy authorities should take this risk into consideration and maintain a cautious approach, which justifies our scenario of an ongoing accommodating policy mix.Paola MONPERRUS-VERONI, Economist