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Europe Risks ‘Deeper Recessions’ on War & Inflation

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Downturns in parts of Europe could turn into “deeper recessions” across the continent as energy disruptions threaten economic pain, while a cost-of-living crisis risks stoking social tensions, the IMF said Sunday. online news

The International Monetary Fund’s Regional Economic Outlook report on Europe comes as countries grapple with heightened inflation and a worsening energy crisis that has depressed the purchasing power of households and raised business costs.

New government support “only partly” offsets these strains, said the fund on Sunday.

Russia’s invasion of Ukraine this year sent inflation soaring as energy prices jumped, forcing the European Central Bank to hike 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 to remain elevated,” the IMF said in its report.

Already, the fund predicts that Germany and Italy will slip into recession next year, becoming the first advanced economies to contract in the wake of the war on Europe’s eastern flank.

While Europe was on its way to exit the pandemic at the end of last year, war in Ukraine “changed this picture completely,” the IMF said.

Overall, growth in Europe’s advanced economies is expected to slow markedly to 0.6 percent in 2023, the report on Sunday said.

For the region’s emerging economies, excluding conflict countries and Turkey, growth is pegged to slow to 1.7 percent as well, while losses in conflict countries will be large.

“A key near-term risk is further disruption to energy supplies, which, combined with a cold winter, could lead to gas shortages, rationing, and deeper economic pain,” said the IMF.

Inflation could also stay higher for longer and social tensions could worsen due to rising costs, the fund added.

Under current circumstances, central banks should continue raising policy rates, said the IMF, calling for “faster hikes” in advanced economies.

Policymakers need to “walk a fine line” between fighting inflation and supporting vulnerable households and enterprises through the energy crisis, it said.

Earlier this month, the IMF forecast that the German economy — Europe’s biggest — would shrink 0.3 percent in 2023, hit hard by its reliance on Russian gas after Moscow cut supplies to Europe in suspected retaliation for Western sanctions over the conflict.

Italy, whose industries are also dependent on gas imports, will see its gross domestic product contract by 0.2 percent.


© Agence France-Presse. All rights are reserved.

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Notes from APS Radio News

From the early part of March 2020 to April 15, 2022, the US Federal Reserve had been increasing its holdings by nearly $5 trillion dollars.

It did this each month of that period by buying billions of dollars of corporation and government bonds, in effect, infusing massive amounts of money into the economy.

And, as the FRED graph shows, it did so at rapid rate or at a high rate of velocity.

Economists say that when massive amoutns of fiat money are infused into the economy at high rates of velocity, the likelihood of noticeably higher rates of inflation is made greater.

A number of other central banks followed a similar policy.

For example, between late February 2020, even days before the media started fixating on the virus thingy, and March of this year, the European Central Bank embarked on its own version of monetary expansion.

During that period, the ECB increased its holdings by over 5 trillion euros.

The Bank of Japan also increased its holdings.

Between February of 2020 and earlier this year, it had increased its holding by a few hundred trillion Yen.

For a number of years, including the Bank of Japan, major central banks have kept their interest rates low.

For its part, the Bank of Japan kept its interest rates at negative rates, meaning that depositors had to pay banks to hold their money.

During and before the pandemic, major corporations had increased the number of mergers and acquisitions, as those entities were able to make their purchases using inexpensive money and higher stock valuations.

The other part of the equation was that of supply.

As a result of lockdowns, many small and medium-sized businesses were closed.

Shipping ports had lost workers, and truck drivers going to those ports had to wait in long lines, as a result.

In effect, well before Russia’s invasion of Ukraine, shortages of various goods and services developed.

The invasion and sanctions imposed have aggravated shortages of commodities like petroleum and grain.

And there have been instances of price gouging.

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