Energy will dominate euro area’s economic outlook for a long time yet

Abstract

The euro area has been drawn into an energy crisis that could have a long-term impact on the area’s economy. The escalating price of energy is increasing euro area import prices, weakening the current account and further adding to business and household costs as well as public expenditures. The effects are already visible in inflation, but forecasts indicate that the growth impact of the energy crisis on the euro area economy is yet to come. Growth in the rest of the global economy beyond the euro area also appears to be slowing, especially on account of the situation in the economies of the United States and China. There is considerable uncertainty surrounding the future availability and price of energy and the ability of the euro area economy to adjust to the transformation of the energy market, and this is darkening the economic outlook for the immediate years ahead. Since inflation is already too high and could stay above target for an extended period, the ECB Governing Council has begun a cycle of monetary policy tightening, making two successive increases in policy rates, in July and September.