German output is likely to shrink this and next quarter as the high natural gas prices resulting from the Russia-Ukraine war is hurting households and manufacturers. The chemical industry is under pressure, because of its heavy usage of energy and inability to pass the higher costs onto consumers.

The International Monetary Fund (IMF) warned on the weekend that the global economic outlook is even gloomier than projected last month, particularly in Europe, with economic activity in most developed economies set to contract amid broad-based elevated inflation and a steady worsening in purchasing manager surveys, which measure manufacturing and service sector activity.

The IMF blamed the deteriorating outlook on tightening monetary policy triggered by persistently high inflation, weak growth in China, the war in Ukraine, and ongoing supply chain disruptions.

A worsening energy crisis in Europe would severely impact growth and trigger a prolonged high inflation, which could prompt larger than anticipated policy interest rate hikes. The ECB is trying to avoid overtightening and is far behind the Fed and other central banks, as aggressive rate hikes could destroy productive capacity.

EU officials cut their economic growth forecasts for 2023 amid serious energy crisis in Europe, uncertainty due to the war in Ukraine and eroded purchasing power for households. There is risk for potential further shocks especially in the currently unfavourable gas market with potential shortages in in the winter of 2023-2024. The economic growth forecast for 2022 is 3.2%, while for 2023, the European Commission forecasts growth of only 0.3% compared to previous expectations of 1.4% (released in July), with the German economy likely to contract the most in 2023.

In October 2022, inflation in the EU reached a new high of 10.7%, while the average price growth could come around 8.5% in 2022. Inflation is expected to be around 6.1% in 2023 and 2.6% in 2024. Inflation continues to grow faster than expected and the economic outlook deteriorated significantly.

In Europe policy makers are maintaining its stance that for as long as broad-based inflation remains high, interest rate hikes are on the agenda. The ECB is likely to bring its monetary policy rate above 2%, but the previous jumbo rate hikes are unlikely to become a norm.