Is stagflation a highly likely scenario, or will the European economy enter a recession this year? How will governments respond?
Our central scenario is of a winter recession with high inflation, following a stagflationary shock via a significant deterioration in terms of trade and high imported inflation. So far, the stagflationary environment is confirmed as we have been revising up inflation and downgrading economic growth. The future direction is also stagflationary as inflation is expected to move higher, whereas growth is expected to decelerate and even contract.
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