ECB – Economic Bulletin Issue, 2023

The European Central Bank (ECB) is determined to bring inflation back to its target of 2% in a timely manner. In order to do so, the ECB has decided to raise the three key interest rates by 25 basis points. The ECB staff projects that average inflation in the euro area will be at 5.6% in 2023, 3.2% in 2024, and 2.1% in 2025, with higher energy prices being the main reason for the upward revision. Despite some easing in most indicators, underlying price pressures remain high. The previous interest rate increases have had a strong impact on domestic demand, and tightening financing conditions are also dampening demand. The economic growth projections have been significantly lowered by the ECB staff. They expect the euro area economy to expand by 0.7% in 2023, 1.0% in 2024, and 1.5% in 2025. The weak economic activity is attributed to lower demand for exports, tight financing conditions, and weakening in the services sector. However, the ECB expects economic momentum to pick up over time, supported by rising real incomes, falling inflation, increasing wages, and a strong labor market. The unemployment rate remains low at 6.4%, but the growth in employment is slowing down. Overall, the short-term outlook for growth in the euro area has deteriorated, but over the medium term, the economy is expected to gradually return to moderate growth as both domestic and foreign demand recover. However, the tightening of the ECB's monetary policy, adverse credit supply conditions, and the gradual withdrawal of fiscal support will continue to dampen growth. The outlook for GDP growth has been revised down, reflecting a weaker short-term outlook and tightening financing conditions.