2023 in Review: A Year of Economic Challenges and Hope
The year 2023 has been a rollercoaster ride for the global economy, with Europe experiencing significant economic pressure and uncertainty. As we reflect on the events of the past year, it becomes evident that the challenges faced in 2022 continued to intensify.
The year was marked by a series of shocks that further intensified the already tumultuous situation. High inflation continued to cut into purchasing power, interest rates rose, property prices fell, and real wages declined. However, amidst the challenges, there are glimmers of hope, with signs of inflation easing, interest rates stabilising, and the real estate market pointing to signs of recovery.
The last edition of the Economy in Focus for 2023 delves into the key economic trends and developments that shaped 2023, providing expert commentary and analysis from Intrum's Senior Economist, Anna Zabrodzka-Averianov.
Highlights from the Economy in Focus #7
Inflation: A Battle Against Soaring PricesThe inflation crisis continued in 2023 after erupting in 2022, with Europe experiencing double-digit inflation not seen since the early 1980s recession. The surge in energy prices played a significant role in driving up inflation, leading to a wave of policy rate hikes by central banks. Despite gradual decline throughout the year, inflation has remained stubbornly high, prompting continued efforts to combat it. The European Central Bank (ECB) and other central banks in Europe have raised interest rates multiple times, aiming to bring inflation under control.
Interest Rates: A Drastic Shift in Monetary PolicyThe relationship between interest rates and inflation has been challenged in recent years. Contrary to conventional wisdom, low interest rates did not spur inflation, and high rates did not suppress it. Following the Global Financial Crisis, interest rates remained low and even negative, while inflation struggled to reach target levels. In 2023, the ECB took a bold step by raising policy rates six times, leading to the fastest tightening cycle since the introduction of the euro. However, the persistence of high inflation despite these rate hikes raises questions about the effectiveness of traditional monetary policy tools. The true impact of these rate hikes will only become evident in 2024.
Property Market: Strained by Rising Interest CostsThe property market faced considerable challenges in 2023, primarily due to the sharp increase in interest rates. Mortgage costs tripled for the average European since 2022, placing significant strain on homeowners. As a result, property prices experienced their first year-on-year decline in almost a decade. While the average decline was modest, highly leveraged households in Northern Europe, such as Germany, Denmark, and Sweden, faced more substantial price falls. The commercial real estate sector also suffered, with dealmaking at an 11-year low.
Declining Purchasing Power: A Struggle for European HouseholdsReal wages, a crucial indicator of purchasing power, experienced a decline in Europe during the first half of 2023. The contraction in global real wages since 2022 persisted, albeit at a slower pace, as inflation remained high. Europe's wage negotiation system, often reliant on collective bargaining, contributed to a lag in wage response to inflation. However, there are signs of improvement, with real wage development turning positive in the latter half of the year. Despite this, a significant portion of Europeans still struggle to make ends meet, with 76% either breaking even or overspending every month. The financial situation for young adults, particularly in terms of buying their own homes, remains challenging.
Late Payment Regulation: Addressing an Ongoing IssueLate payments between businesses have long been a headache for Europe's economy and problems intensified visibly during the recent inflation crisis. The Late Payment Directive, introduced in 2011, aimed to address this problem but proved insufficient. In 2023, the European Commission proposed expanding this directive to tackle the increasing prevalence of late payments and non-performing loans. The proposed regulation seeks to shorten payment terms and strengthen the liquidity of small and medium-sized enterprises (SMEs). Timely payments are crucial for a well-functioning financial ecosystem and a prosperous society, and legislative efforts to combat late payments highlight the importance of this issue.
As we navigate through these challenging times, Intrum remains committed to providing expert insights and solutions to help individuals and businesses overcome financial difficulties. Download our report to gain a deeper understanding of the economic events of 2023.