Europe's prospects
Promises of eternal growth forecasts have been replaced by headlines describing how an era of low inflation is over for good, how Britain's growth has shrunk the most since 1709 and how the winter will be cold due to the energy crisis. By contrast, Germany may be going to keep shutting down their nuclear reactors.
As can be seen in the
chart above, gas prices in Europe have risen sharply in the shadow of the
energy crisis we were already facing before Russia's invasion of Ukraine. Since
then, things have got much worse and residents across Europe are worried about
how they can afford further rises in energy and food costs.
It is clear that the
idea of a 2% inflation target world is long gone, and that prices will continue
to rise. The fact that price rises are now due more to imbalances in supply and
demand than 14 years of loose monetary policy also means that the power of
central banks is limited. Certainly, a recession can be expected to eventually
depress demand and thus prices, but the idea that it would lead to a
deflationary state seems remote. Moreover, extremely high energy prices may
instead lead to further, albeit short-term, stimulus if the only way to afford
rising electricity prices is financial support.
The outlook in Europe
is bleak, and the light in the tunnel is almost non-existent. High inflation is
here to stay and sooner or later the ECB will have to normalise interest rates
which will be another setback for Europe.
Risks
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