ECB says Europe’s economy seen ‘far’ from stagflation scenario

“Current expert forecasts remain far from a stagflation scenario,” the ECB said. “However, uncertainty has increased,” leading to a greater range of estimated outcomes.

While growth forecasts were cut and price expectations raised following Russia’s invasion of Ukraine, economic activity is still seen increasing next year and inflation is expected to slow below 2% in the second half of 2023.

Experts on the European economy don’t expect the region to endure stagflation akin to the 1970s and characterized by quickly rising prices amid output that barely rises or even contracts, according to analysis by the European Central Bank.

While growth forecasts were cut and price expectations raised following Russia’s invasion of Ukraine, economic activity is still seen increasing next year and inflation is expected to slow below 2% in the second half of 2023, ECB researchers said Wednesday in a report.

“Current expert forecasts remain far from a stagflation scenario,” it said. “However, uncertainty has increased,” leading to a greater range of estimated outcomes.

The researchers also said that some differences between the current situation and the 1970s “make it less likely that stagflation will develop now.” Dependence on oil has decreased since then, workers have become less unionized, and the economy is still being bolstered by the pandemic reopening, they said.

Anti-fragmentation tool

The European Central Bank's tool to combat rising government debt yields in some euro zone countries should not interfere with the bank's aim to control inflation, ECB Vice-President Luis de Guindos said on Wednesday.

"Fragmentation instruments should not interfere with the overall monetary policy approach, which should be focused on fighting inflation," De Guindos told a financial event in Spain.

In an emergency meeting last week, the European Central Bank decided to direct bond reinvestment to help nations on the bloc's southern rim, and to devise a new instrument to contain divergence in borrowing costs. 

De Guindos said that fragmentation was among the significant concerns of the ECB and that it was committed to combat it though details had still not been discussed at the bank's governing council yet.

• Bloomberg and Reuters