Finally, another energy supply shock—perhaps caused by further escalation of tensions in Ukraine—cannot be ruled out. This is particularly pertinent, as Europe’s capacity to absorb another energy shock is limited.
A recent and highly regarded business survey1, for example, suggested more than half of German businesses might be forced to cut back or halt production to achieve additional natural-gas savings, potentially weighing on jobs and economic growth.
In short, the energy crisis in Europe is far from over and the region’s economic prospects remain under a cloud.
We expect the euro area to be in recession in 2023 as the region’s economy contends with the lingering headwinds from the war and rising interest rates. That said, given the recent fall in natural-gas prices, better-than-expected activity data, and China’s reopening, we now call for a milder contraction in output.
As we outlined in the Vanguard Economic and Market Outlook for 2023, we also expect inflation to remain above target and monetary policy rates in restrictive territory until 2024 at the earliest.