Risks to the growth outlook remain tilted to the downside, as economic and geopolitical uncertainty and risks remain extraordinarily high. Excessive monetary policy tightening (US), a broadening real estate crisis and Covid policies (China) and problems to refill gas stocks during 2023/2024 (EU) form major risks heading into 2023. "The risks of a significant economic downturn are significant. Still, incoming data are consistent with a mild recession. We hence confirm our stance that a 'Mild Recession' scenario remains the reference scenario".
KBC representatives pointed out that a key problem of the world economy is excessively high inflation. "While the peak of inflation may be in reach as energy markets stabilize or cool down and monetary policy starts to bite, the expected deceleration of inflation during 2023 may be only gradual in many countries. We expect the contribution of energy inflation to strongly decrease, but core inflation components are likely to remain a more persistent source of inflation. In several of the European economies, wage pressures and adjustments in regulated prices will generate upward inflation pressures".
At the same time, monetary policy is entering a new phase. "Early moving central banks (such as the Czech and Hungarian central bank) are pausing or even outright halting their tightening cycle, while major central banks (in particular Fed and ECB) announced a slowing of their tightening pace. We expect the Fed and ECB to move policy rates gradually above neutral before stabilizing during 2023 well above 5% and 3%, respectively. For both the Fed and the ECB, the risk of 'higher for longer' policy rates are flagged. Moreover, the Fed has already started its quantitative tightening phase, while the ECB is expected to follow suit from early 2023 on".
However, for the time being, given the build-up of substantial gas reserves, European countries are expected to 'get through winter', staving off protracted and critical energy shortages, KBC said.
Read the full statement released by KBC here.