Eurozone – 2023-2024 scenario: an unusual mix of powerful supportive and detrimental factors
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- Recent developments and short term scenario
- Themes of the scenario
- Focus: inflation and its new drivers
- The policy mix
Eurozone economic activity has dipped substantially on adverse shocks and high uncertainty. But the surprising resilience of the economy has prevented a recession. Our scenario forecasts a soft landing, with GDP growth of 0.6% in 2023 and 1.2% in 2024.
The tension between a healthy private sector and persistently higher core inflation is making it harder for the ECB to manage the transition, the key challenge being to shift as smoothly as possible from this resilience to the end of the expansion phase. If our scenario forecasts a soft landing, the timing and effects of pro-cyclical monetary tightening could still come hand in hand with downside risks over the period in question if rising interest rates hit the labour market and credit cycle harder than expected. Although most indicators suggest that we have already reached the peak of the inflationary shock, second-round effects are visible as a consequence of the strengthening in the pricing power of Eurozone companies and the opportunistic behaviour facilitated by relative price volatility.Paola MONPERRUS-VERONI, Economist