ECB Insider: New 2024 HICP Projection Won’t Move Much; 2023 GDP and HICP to See Big Changes
1 September 2022
By David Barwick – FRANKFURT (Econostream) – The next set of European Central Bank staff macroeconomic projections for the euro area, due to be unveiled on Thursday, will see medium-term inflation little changed, while forecasts for 2023 will include substantial revisions to both inflation (upwards) and growth (downwards), an ECB insider told Econostream.
‘It seems that we are going to revise inflation up for 2023, mostly’, this person said. ‘2022, yes, but only a little bit.’ Similarly, 2024 HICP ‘will not be much different than we had in June’, the person said. ‘Not lower, but not much higher. It will be close to 2%.’
Current staff projections dating from June call for euro area HICP of 6.8% this year, 3.5% next year and 2.1% in 2024. Scepticism about the reliability of the ECB’s models has been on the rise for some time, a circumstance ECB President Christine Lagarde commented on only last week.
‘We can no longer rely exclusively on the projections provided by our models – they have repeatedly had to be revised upwards over these past two years’, she said. ‘There are things that the models don’t capture. Sometimes the unexpected happens. … Yes, that’s where the “element of judgement” comes in.’
Given that the problem with staff forecasts has been one of under- rather than over-estimation of inflation, and in view of fears that persistently elevated inflation readings could lead to a dis-anchoring of expectations, a failure of medium-term price pressures to subside – let alone any further increase in them – would tend to support a stronger monetary policy response.
However, the insider took the view that ‘2024 won’t be the problem, 2023 will be the problem.’ Next year ‘will be the year that major forecast revisions compared to June will happen, with respect to both inflation and output’, he said.
The projections from June envision real GDP growth of 2.8% this year and 2.1% in both 2023 and 2024.
Though it was ‘difficult to say’ whether the technical definition of a recession would be met, with euro area labour markets still holding up well, stagnation or even a brief economic contraction could not be excluded ‘towards the end of this year or the beginning of next year’, he said.