The new support from the authorities compensates “only in part” for these tensions, the IMF said on Sunday.
Russia’s invasion of Ukraine this year spiked inflation as energy prices rose, forcing the European Central Bank to raise interest rates to cool the economy at the risk of causing a contraction.
“The European outlook has darkened considerably, with growth set to slow sharply and inflation remaining elevated,” the IMF said in its report.
The Fund predicts that Germany and Italy will slide into recession next year, becoming the first advanced economies to post war shrinkage on Europe’s eastern flank.
Growth in Europe’s advanced economies is expected to slow sharply to 0.6% in 2023, according to Sunday’s report.
For emerging economies in the region, excluding conflict countries and Turkey, growth is also forecast to fall to 1.7%, while losses in conflict countries are large.
“A key short-term risk is further disruption to energy supplies, which, combined with a cold winter, could lead to gas shortages, rationing and deeper economic suffering,” the IMF said.
Inflation could also stay high for longer and social tensions could worsen due to rising costs, the Fund added.
In the current circumstances, central banks should continue to raise interest rates, the IMF said, calling for “faster increases” in advanced economies.
Policymakers must “walk a fine line” between fighting inflation and supporting vulnerable households and businesses during the energy crisis, he said.
Earlier this month, The IMF forecast that the German economy – the largest in Europe – would contract by 0.3% in 2023, badly affected by its dependence on Russian gas after Moscow cut off supplies to Europe in alleged retaliation for Western sanctions over the conflict.
Italy, whose industries also depend on gas imports, will see its Gross Domestic Product contract by 0.2%.
Source: Ambito
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