Eurozone: Uncertain Outlook, Recession Risk Remains

“A recession remains a possible scenario due to the deterioration of the already weak economic outlook.” This is evident from the Financial Stability Review published by the European Central Bank (ECB) for November 2023.

The outlook for financial stability in the Eurozone is fragile, with tightening financial conditions increasingly spreading through the real economy. And all this is in the context characterized by weak growth, high inflation, and persistent geopolitical tensions.

In addition, according to ECB explanation, the full impact of tightening financial conditions on the real economy is yet to be felt, while families, businesses, and governments will be put to test. Even banks that now boost profitability due to high rates will face the risk of non-performing loans and declining lending. The financial and non-financial sectors may face impacts that are already visible in falling real estate markets, especially residential markets, where prices keep falling due to high mortgage costs, thus discouraging potential buyers.

According to ECB Vice-President Luis de Guindos, “Weak economic prospects and the effects of high inflation are straining the ability of people, businesses, and governments to service their debts. It is critical that we remain vigilant, as the economy moves into an environment of higher interest rates and increasing geopolitical uncertainty and tension.”