IMF: «Risk of recession for the EU with inflation at 5%» | EUROtoday

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The EU may very well be “bordering on recession, with inflation approaching the 5% threshold.” No European nation is resistant to it.” Alfred Kammer, head of the European Department of the International Monetary Fund, writes this in an analysis on the IMF Blog. The region “should reply to vitality shocks with disciplined insurance policies that shield susceptible teams and strengthen resilience”, notes Kammer. The energy shock, of a smaller magnitude than that of 2022 and now rooted in the conflict in the Middle East, “is weighing on development and pushing inflation greater”. The IMF estimates 2026 inflation at 2.8% from 2.5% in 2025.

Before the outbreak of war in the Middle East, observes Kammer, “our forecasts would have been revised upwards: now, nonetheless, we’re observing a slowdown in development”. Preliminary data already indicates a weakening of private investment and consumption. Growth prospects for the euro area are estimated at just 1.1% in 2026 and 1.3% for the European Union: these are forecasts “accompanied by a excessive diploma of uncertainty”. In a extra extreme state of affairs, as described within the World Economic Outlook, characterised by a persistent provide shock and aggravated by a tightening of economic circumstances, inflation at 5% would convey recession nearer. Economic coverage makers face intense strain to “act quickly, visibly and for the benefit of all. This often results in the adoption of policies that result in long-term disadvantages that outweigh the immediate benefits. On the contrary, targeted support is much more effective”, adds Kammer.

Europe’s response should be guided by two imperatives: “the adoption of a solid macroeconomic policy, adapted to a global context characterized by frequent and unpredictable shocks”, and “the building of resilience that does not lead to waste of budgetary resources or interference with the free functioning of markets”. As regards monetary policy, central banks must maintain an “absolute concentration on the objective of keeping inflationary expectations anchored”. In the euro area – where inflation is close to the target level and medium-term expectations appear substantially anchored – the ECB has a certain margin to adopt a wait-and-see attitude, observing the evolution of the shock before intervening. “We currently expect a cumulative 50 basis point increase in the policy rate by the end of this year, while maintaining a broadly neutral monetary stance in light of higher near-term inflation expectations.”