According to some experts, the coming years could be very difficult for the EU. It is possible that his economy will have to rebuild fundamentally. What will happen to the euro is also a question.
What worries the World Bank?
Its head David Malpass has named the factors that increase the risk of recession in Europe - weakness of the euro and high inflation. There are risks of a long-term decline in the growth of the European economy.
The most important problem is the energy crisis. According to Malpass, it will take years for the global industry to replace Russian energy sources. And the EU is unlikely to solve the energy crisis quickly. The same LNG terminals in Germany are not expected to be built until the second half of 2023.
All of this raises the risk of prolonged stagflation. It's all according to the formula: economy doesn't grow - stagnation, but prices go up anyway - inflation.
Moreover: the main trading partners are not doing well either, and as a result, demand for European exports may be lower, and it will be harder to import. After all, China's growth is slowing sharply, and production in the U.S. shrank in the first half of the year.
Negative forecasts multiply: crisis, recession, GDP decline
Deutsche Bank is lowering its outlook for the European market because of the worsening energy crisis. The recession may be deeper and prolonged, analysts say.
In addition, from the middle of 2022 to the middle of 2023, the real GDP of the Eurozone will fall by 3%, according to estimates of Deutsche. Of strong concern is winter, where there could be "an even steeper decline."
ECB head Christine Lagarde also said that eurozone GDP could fall in late 2022 and early 2023. In the baseline scenario, the regulator still expects GDP growth of 0.9% in 2023, although it is still a strong slowdown: since the beginning of 2022, we have seen growth of 4-5%. And under the unfavorable scenario there will be a decline of GDP by 0.9%. And some of the conditions for such a scenario have already materialized.
Not only Europe is under attack: what will happen to the world economy in 2023?
It is possible that the entire global economy at risk of recession next year, say the World Bank. The wave of tightening of central bank policy may not be enough to curb inflation, but it may hurt economic growth. As a result, global GDP growth will slow to 0.5% in 2023, already on the verge of a global recession. And despite record growth in 2021, the global economy will never recover to pre-decline levels.
What will happen to the euro in 2022/2023?
If the EU economy slows down and is on the verge of recession and stagflation, the currency will inevitably weaken as well. Capital from around the world is now fleeing to the U.S., trying to find a safe haven there. And given the projections, the euro may not soon return even to parity with the dollar. And while, for example, the yuan is still supported by a resilient Chinese economy, in Europe the situation is worse.
The energy crisis in the EU also plays into the hands of the dollar, but will weaken the euro. After all, the U.S. is one of the countries now supplying energy to Europe instead of Russia. They mostly import LNG, although higher prices on the domestic market may slow down these exports.
Not only that, but European companies are shifting production to the U.S. because of expensive energy at home, the WSJ says. And if this continues, the European economy and currency could weaken even further in the long term. But the "greenback" will be just strengthening.
In this case, the euro may not return to pre-crisis values in the coming years, it will continue to lose to the dollar.
What to expect from the Euro in 2023?
Most likely, in 2023 we should not expect to see a significant strengthening of the euro. And then we are in for more uncertainty. Although long-term trends are also against the EU currency.
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