Europe could still avoid deep downturn but energy crisis ‘not transitory’ – IMF

MADRID (ICIS)–The strength of labour markets in some European countries could help the region avoid a deep downturn but the energy crisis is set to make the upcoming two winters a difficult period, the International Monetary Fund (IMF) said on Tuesday.

The IMF lowered its 2023 forecast for global growth in its latest World Economic Outlook (WEO), although it left 2022 growth expectations unchanged.

For the 19-country eurozone, it revised up its forecast for 2022 on the back of stronger-than-expected Q2 growth in southern economies, spurred by tourism as pandemic-related restrictions eased.

“Winter 2022 will be challenging for Europe, but winter 2023 will likely be worse,” said the IMF.

“The energy crisis, especially in Europe, is not a transitory shock. The geopolitical re-alignment of energy supplies in the wake of Russia’s war against Ukraine is broad and permanent.”

The UK, the other large European economy, is also expected to slow down sharply in 2023 as high inflation reduces consumers’ purchasing power and tighter monetary policy takes a toll on consumer spending and business investment.

“This forecast was prepared before the announcement (23 September) of the sizeable fiscal package and incorporates a less substantial fiscal expansion. The fiscal package is expected to lift growth somewhat above the forecast in the near term, while complicating the fight against inflation,” said the IMF.

For Europe as a whole, the Washington-based body said forward-looking indicators such new manufacturing orders and sentiment gauges are suggesting a slowdown among major economies although in some cases “signals conflict, with some indicators showing output weakness” amid labour market strength.

This is the third growth forecast the IMF has published this year, revising figures published in July, which were themselves revised from its April forecast.

GDP forecasts	2022	2023	Difference from July’s WEO		Difference from April’s WEO
Eurozone	3.1	0.5	0.5	-0.7	0.3	-1.8
-Germany	1.5	-0.3	0.3	-1.1	-0.6	-3.0
-France	2.5	0.7	0.2	-0.3	-0.4	-0.7
-Italy	3.2	-0.2	0.2	-0.9	0.9	-1.9
-Spain	4.3	1.2	0.3	-0.8	-0.5	-2.1
UK	3.6	0.3	0.4	-0.2	-0.1	-0.9
Russia	-3.4	-2.3	2.6	1.2	5.1	0.0
World	3.2	2.7	0.0	-0.2	-0.4	-0.9

Russia’s economy is resisting the sanctions implemented against it by major countries, with a strong labour market, said the IMF, revising sharply upwards the country’s expected growth in output.

“Russia’s economy is estimated to have contracted by 21.8% (at a quarterly annualised rate) during the second quarter, although crude oil and non-energy exports held up,” said the IMF.

“Russian domestic demand is showing some stability, thanks to containment of the effect of sanctions on the domestic financial sector policy support, and a resilient labour market.”

For Ukraine, the IMF said it expects its GDP to contract by 35% in 2022 but did not issue further guidance on the country.

The IMF also said European economies could avoid an upward wage spiral on the back of high prices, which in turn would feed again into ever higher inflation rates.

This would make moves by the European Central Bank (ECB, the central bank for the 19-country eurozone) to rein in inflation, rising interest rates, less effective, the Washington-based IMF said.

“[However] These challenges do not imply that a large downturn is inevitable. In many countries, including the US, the UK, and the eurozone, labour markets remain tight, with historically low unemployment rates and high levels of vacancies,” it said.

“The current environment — despite rapidly rising prices and wages — may still avert a wage-price spiral unless inflation expectations become de-anchored. Fiscal authorities in the region need to plan and co-ordinate accordingly.”