The European Central Bank (ECB) does not expect the eurozone to experience a period of stagflation as it did in the 1970s. This is according to researchers from the central bank in a report. Stagflation occurs when the economy slows and inflation rises rapidly when unemployment is high.
Although euro area growth forecasts have been lowered and inflation expectations have been raised after Russia invaded Ukraine, economic activity will still pick up next year, the ECB researchers say. Inflation is also expected to fall below 2 percent in the second half of 2023.
Inflation in the eurozone stood at 8.1 percent in May and is mainly driven by the sharp rise in energy and food prices due to the war in Ukraine. The ECB aims for an inflation rate of 2 percent. Experts’ current forecasts remain far from a stagflation scenario, the researchers said, pointing out that uncertainty surrounding the forecasts has increased.
According to the ECB researchers, differences between the current situation and that in the 1970s make it “less likely” that stagflation will occur. For example, dependence on oil has declined since then. Also, fewer workers are unionized, reducing wage demands and continuing to support the economy during the pandemic recovery.
ECB President Christine Lagarde already announced at the beginning of May that he was not taking into account a scenario of stagflation for the eurozone and that the current situation cannot be compared with that in the 1970s. At that time, sky-high inflation was accompanied by economic stagnation and rapidly rising unemployment. The economists of the Organization for Economic Co-operation and Development (OECD) also believe that the risk of global stagflation is limited.