The labour market is expected to remain relatively resilient to the coming mild recession, reflecting labour hoarding amid still significant labour shortages. As a result, economic growth is expected to rebound, also supported by strengthening foreign demand and the resolution of remaining supply bottlenecks, despite less favourable financing conditions. Over the medium term, as the energy market rebalances, it is expected that uncertainty will decline, and real incomes will improve. In addition, high levels of natural gas inventories and ongoing efforts to reduce demand and replace Russian gas with alternative sources imply that the euro area is expected to avoid the need for mandated energy-related production cuts over the projection horizon, although risks of energy supply disruptions remain elevated, in particular for the winter of 2023-24. The negative economic repercussions are expected to be partially mitigated by fiscal policy measures. As the economic consequences of the war in Ukraine unfold and fuel the strong inflationary pressures, consumer and business confidence have remained subdued, while real disposable incomes are being eroded and soaring cost pressures are curtailing production, especially in energy-intensive industries. Staff now expects a short-lived and shallow recession in the euro area at the turn of the year. However, the ongoing energy crisis, high inflation, elevated uncertainty, the global slowdown and tighter financing conditions are all dragging down economic activity and have already led to a sharp slowdown in real GDP growth in the third quarter of 2022. Economic growth was stronger than previously expected over the summer owing to the boost to services activity from the reopening of the economy and from government support measures. The outlook for the euro area has deteriorated somewhat, with weaker growth and higher and more persistent inflation than envisaged in the September 2022 ECB staff macroeconomic projections.

Oil markets edge drag on