War-linked energy shock pushing inflation higher in Europe: IMF expert

In a blog post, Alfred Kammer, director of the IMF’s European department, said his organisation sees growth slowing down in the continent. Initial data point already to weaker private investment and consumption.

The energy shock that has hit Europe due to the Middle East conflict, though smaller than in 2022, is weighing on growth and pushing inflation higher, an IMF expert recently cautioned.
IMF sees growth slowing down in the continent.
Initial data point already to weaker private investment and consumption.
Central banks must remain laser focused on keeping inflation expectations anchored, he wrote.

The outlook for euro area growth is projected at just 1.1 per cent in 2026, for the European Union it is 1.3 per cent; and this forecast comes with a high degree of uncertainty.

In a more severe scenario as described in the World Economic Outlook—a persistent supply shock compounded by tightening financial conditions—the EU could come close to recession with inflation approaching 5 per cent. No European country is spared, Kammer observed.

Policymakers face intense pressure—to act fast, visibly and for all, which results in policies that have more long-term downsides than short-term benefits, he wrote.

Targeted support is much more effective. Europe’s response to this shock should be shaped by two imperatives, he suggested. First, robust macroeconomic policy that is fit for a world with unpredictable and frequent shocks, and second, resilience built without wasting fiscal resources or getting in the way of markets.

The first imperative involves getting monetary and fiscal policy right. Central banks must remain laser focused on keeping inflation expectations anchored, the IMF expert wrote.

In the euro area, where inflation is close to target and medium-term expectations are broadly anchored, the European Central Bank has some scope to wait and observe the shock evolve before acting. IMF now expects a cumulative 50 basis point increase in the policy rate by the end of this year, maintaining a broadly neutral monetary stance in light of higher near-term inflation expectations, Kammer noted.

A rise in core inflation or increasing medium-term expectations would warrant a more restrictive stance, he wrote.

“Europe must reform under pressure. The current shock is not an argument for delay. It is all the more reason to push forward the reform agenda,” Kammer added.

Fibre2Fashion News Desk (DS)