Eurozone ‘coming closer’ to contraction in 2023, says ECB

Uncertainty about Russian energy imports is pushing the eurozone closer towards a contraction in 2023, a senior European Central Bank official said Friday.

“What we considered as our downside scenario in September, is coming closer to the baseline scenario,” ECB vice-president Luis de Guindos told Lithuanian business weekly Verslo zinios.

The downside scenario from the ECB’s September projections would see the euro area economy shrink by almost one percent next year, while the baseline scenario forecast growth of 0.9 percent.

“The difference between the baseline and downside scenarios lies in the evolution of energy supplies from Russia,” De Guindos said.

“The assumption under the baseline scenario is that 20 percent of energy deliveries would continue to be supplied, whereas the downside scenario assumes a total cut-off.”

Russia has drastically reduced gas supplies to Europe in recent months, in a move seen as retaliation for Western sanctions over Moscow’s war in Ukraine.

No gas has flowed through the crucial Nord Stream 1 pipeline between Russia and the EU’s largest economy Germany since late August.

The fallout from the war has sent energy prices surging on the continent, pushing already-high inflation to new records.

The ECB has joined central banks around the world in hiking interest rates to cool prices and dampen demand, at the risk of triggering an economic downturn.

Inflation in the 19-nation eurozone hit a fresh high of 10 percent in September.

De Guindos said if the ECB’s bleaker outlook prevailed, annual inflation would climb by 8.4 percent this year and 6.9 percent in 2023.

The ECB’s governing council holds its next monetary policy meeting on October 27, with observers expecting another jumbo rate increase of 0.75 percentage points.

“We will do whatever is necessary to bring inflation back to our two-percent target over the medium term,” De Guindos said.