Eurosystem staff macroeconomic projections for the euro area, December 2022

The decline in inflation over the projection horizon reflects strong energy-related downward base effects throughout the course of 2023, the gradual impact of the normalisation of the ECB’s monetary policy which started in December 2021, the weaker growth outlook and the assumed decline in energy and food commodity prices, in line with futures prices, as well as the assumption that longer-term inf. [...] As the impact of supply disruptions eases on account of a gradual substitution of energy inputs and economic adjustment, the recession would be followed by GDP growth somewhat above the level of growth in the baseline, while the level of GDP in the downside scenario remains below the baseline at the end of the horizon.9 Large commodity price increases imply strong upward price pressures, prolongin. [...] 9 Compared with the downside scenario published in the context of the September 2022 ECB staff macroeconomic projections, a key difference in the current downside scenario is that there are assumed to be gas supply shortages for the next two winters, whereas in the September 2022 downside scenario the main shock was assumed to hit the economy in the winter of 2022-23. [...] In particular, energy inflation will fall sharply in the course of 2023, contributing significantly to the decline in the headline inflation rate from 10% at the end of 2022 to 3.6% in the last quarter of 2023. [...] The expected decline from 4.2% in 2023 to 2.4% in 2025 follows the unwinding of upward impacts from supply bottlenecks and the effects of the reopening of the economy, coupled with lagged effects from the slowdown in growth and some easing of indirect effects from higher energy prices.