The European Central Bank's (ECB) Financial Stability Report warns of an economic contraction that is already beginning to show its first signs.
Source: Unsplash
Author: Redaction
It was this morning from Frankfurt, during the presentation of the ECB's Financial Stability Report, that Luis de Guindos, vice-president of the monetary institution, stated that "our analysis is that the risks to financial stability have increased, while a technical recession in the euro zone is more likely".
The growing potential of an economic environment characterised by an economic downturn, high inflation, tighter financial conditions and lower liquidity is putting increasing pressure on the financial system, and it is certain that, in de Guindos' words, "households and businesses across the Eurozone are already feeling the effects of higher inflation and weaker economic activity amid the ongoing energy crisis caused by the war in Ukraine".
Also according to the ECB's vice-president, "financial conditions have tightened as central banks act to control inflation", a reality that has caused the economy to enter a counter-cycle, resulting in a direct impact felt across all sectors, resulting in greater difficulty for companies to access credit, added to the challenges they have been facing throughout the year "due to higher energy prices and other costs of production factors", resulting in a reduction in their profits and operational liquidity.
And it is in this regard that the ECB calls on global regulators to accelerate their work to address the non-bank financial sector's vulnerability to liquidity crises. "Banks' resilience and profits benefit from higher interest rates, but threats to asset quality may lead to higher provisioning needs" concluded de Guindos.
Economic recession: what is it?
A recession is a general contraction in economic activity. In other words, it is the simultaneous fall in activity in all sectors of activity in an economy. An economy is considered to be in recession when there is a reduction in Gross Domestic Product (GDP) measured in real terms - discounting the effect of inflation - in two consecutive quarters. This decline also has a broadly based negative impact on income, employment, industrial production and wholesale and retail sales.
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