We think the euro-zone is now at the start of a recession, driven by high inflation, tightening financial conditions and weak external demand, and anticipate two quarters of contraction followed by a gradual recovery. Meanwhile, headline inflation should drop steadily next year as past increases in energy and food prices drop out of the year-on-year comparison and global demand-supply imbalances ease. However, the labour market looks set to remain tight, meaning that wage inflation will increase, keeping core inflation well above 2% for at least the next two years.
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