Europe economic outlook, “Inflation has come down very significant”

CGTN Europe

International economist and business consultant Vicky Pryce spoke with CGTN Europe on IMF Europe economic outlook

Transcript

00:00 Europe will need to maintain high interest rates for several years to tame inflation.

00:04 That's the assessment from the International Monetary Fund in its twice yearly economic

00:08 outlook for the region. Overall, growth in Europe is expected to slow from 2.7% in 2022

00:15 down to 1.3% this year, improving only marginally to 1.5% in 2024. And while rising wages are

00:23 helping Europe's economic recovery, they also risk stoking further inflationary pressures.

00:29 The IMF says most countries will not reach their inflation targets before 2025.

00:34 Talk now to Vicky Price, the international economist and business consultant.

00:38 So we've seen that some countries have already started lowering rates, some like the UK

00:46 holding, but we've had this warning of continued high interest rates. Have we reached the peak of

00:52 those across the eurozone, do you think? I think we have. I mean, the tone has changed

00:56 a little bit from the central bankers. We've even here in the UK have heard policy makers

01:02 now talk about the possibility of rates starting to come down sometime next year. And when truth

01:07 is told, I mean, the interesting thing is that inflation has come down very significantly

01:12 already, mainly because of energy prices coming down and also food prices coming down. In some

01:17 cases, we see that wholesale prices are in fact declining. We're seeing input costs in Europe

01:22 also coming down quite significantly. And in some countries in Europe, if you look at the October

01:28 data, we've moved already into recession territory in the sense that we have deflation in a number of

01:35 countries such as Belgium and the Netherlands. So prices are actually falling. So no inflation at

01:42 all. And also we have places like Germany with two quarters of negative growth, with inflation

01:49 itself having come down to around 3% in Germany. Or in all those other cases, if you exclude the

01:54 deflation countries, we are practically near target levels. So the reason for keeping interest

02:00 rates high, as the IMF seems to be suggesting, don't seem to be particularly serious because

02:06 we are seeing an improvement. And that improvement with a slowdown in the economies that we're seeing

02:10 is likely to continue. So as you paint there, not every country the same, different economies,

02:17 different situations. But broadly, do you think that central banks have got this right?

02:22 I think they had to raise rates just to show that they were in control, if you like,

02:27 of the inflation situation. But in reality, what has brought this inflation down is the change in

02:34 prices of oil and gas and, as I said, food prices as well. So far, nothing of the drop that we've

02:41 seen is directly related to what is happening to interest rates. And if you look at what's

02:46 happened in Europe and in the Eurozone, you can see very clearly that that very substantial drop

02:53 in energy costs in particular has been the main reason for what we've seen so far. The real

02:58 concern is what's going to happen next. If the central banks continue to keep interest rates

03:03 where they are, then we are likely to see, probably in the Eurozone, recession continuing

03:10 over the next few quarters. And those figures, those forecasts which have been put now by the

03:16 International Monetary Fund for next year may just not materialise. We've just seen, for example,

03:20 industrial production come down again in Germany in the last month. And what you're seeing is that

03:26 industrial production is 7% down year on year. It's been going on, this decline, for the last

03:31 three months. You've seen retail sales in Europe suffer a number of declines if you look at the

03:37 last few months. So you do have this in-build recession now. And the only change that may

03:43 happen, and I think you've mentioned that in your summary, is that as real wages are beginning to

03:48 increase, maybe consumers are going to start feeling a little bit more confident. But if this

03:52 interest rate stays high, perhaps that is going to be offset by that concern. So rising wages on

03:59 the horizon, as you say there. So good news potentially to kick-start economic recovery.

04:04 But how can countries manage that while also keeping a lid on inflation?

04:08 It is obviously a question that they have to address, particularly when it comes to

04:14 wages maybe starting to increase in real terms. But in reality, inflation is coming down. So I

04:21 think perhaps we can put that to one side and worry a lot more about the possibility, of course,

04:26 of things in the Eastern Mediterranean maybe leading to new increases in oil and gas prices.

04:32 That's a possibility. But if we can leave that aside, the slowdown in the economy that is

04:37 happening is bound to bring that slowdown in inflation as well. So I think we can feel

04:43 reasonably confident that this cycle is turning. And also a reminder to the central banks, I think,

04:49 that we don't have to meet the target of inflation of 2% every year. As long as you're moving

04:54 towards it, as long as you're around it over a number of years, then I think that should be

04:59 sufficient. So I think the hints are coming already and will intensify that perhaps we have

05:04 seen the peak. So hopefully no further rises for interest rates, which also will help, of course,

05:10 businesses which are suffering quite significantly right now. Vicky, great to get your thoughts

05:15 today. Thank you for joining us. That's Vicky Price, the international economist and business

05:18 consultant.

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