Surging oil and gas prices have depleted savings and held back investment while forcing the European Central Bank into unprecedented rate hikes to arrest inflation.
But the economy has displayed some unexpected resilience, too, much like during the COVID-19 pandemic, when growth outperformed expectations as businesses adjusted faster to changed circumstances than policymakers had predicted.
More recent figures like a crucial confidence indicator or the latest PMI data suggest that growth has hit bottom already and a slow recovery is underway, helped by a mild winter that has limited energy spending. With market based energy prices hovering at pre-war levels, the International Monetary Fund upgraded its growth projection for the bloc on Monday, citing unexpected resilience, helped by generous government support. The IMF now sees growth at 0.7% for the full year, above its 0.5% forecast of October and the 0.5% predicted by the European Central Bank in December.
But even if the bloc is doing better than feared, growth in
2023 will be among the weakest on record due to a large drop in
real incomes and surging interest rates.
The ECB has raised rates by a combined 2.5 percentage points
to 2% since July to tame inflation, and markets see another 1.5
percentage points of increases by mid year, which would put the
deposit rate at its highest level since the turn of the century.
Such a rapid increase is putting a brake on bank lending, a
key source of credit for businesses, and access to loans has
already suffered the biggest drop last quarter since the bloc's
2011 debt crisis.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)
