Eurozone coming closer to contraction

Uncertainty about Russian energy imports is pushing the eurozone closer towards a contraction in 2023, two senior European Central Bank officials said Friday.

"Risks to growth are primarily on the downside, particularly because of the economic consequences of the war in Ukraine," ECB president Christine Lagarde said in a statement at an International Monetary Fund meeting.

High inflation, weaker global demand and falling confidence were likely to cause "a significant slowdown" in euro area growth in the second half of the year and early 2023, she said.

In an interview with Lithuanian business weekly Verslo zinios, ECB vice-president Luis de Guindos also saw a darkening outlook.

"What we considered as our downside scenario in September is coming closer to the baseline scenario," he said.

The downside scenario from the ECB's September projections would see the euro area economy shrink by almost one percent next year, while the baseline scenario forecast growth of 0.9 per cent.

"The difference between the baseline and downside scenarios lies in the evolution of energy supplies from Russia," De Guindos said.

"The assumption under the baseline scenario is that 20 per cent of energy deliveries would continue to be supplied, whereas the downside scenario assumes a total cut-off."

Russia has drastically reduced gas supplies to Europe in recent months, in a move seen as retaliation for Western sanctions over Moscow's war in Ukraine.

No gas at all has flowed through the crucial Nord Stream 1 pipeline between Russia and the EU's largest economy Germany since late August.

The fallout from the war has sent energy prices surging on the continent, pushing already-high inflation to new records.

The ECB has joined central banks around the world in hiking interest rates to cool prices and dampen demand, at the risk of triggering an economic downturn.

Inflation in the 19-nation eurozone hit a fresh high of 10 per cent in September.

De Guindos said if the ECB's bleaker outlook prevailed, annual inflation would climb by 8.4 per cent this year and 6.9 per cent in 2023.

ECB governors hold their next monetary policy meeting on October 27, with observers expecting another jumbo rate increase of 0.75 percentage points.

"The ECB's governing council expects to raise interest rates further over the next several meetings," Lagarde said.