More specifically, the Euro area quarterly economic growth reached 4.8 percent in the first half of 2022. However, the biggest impact from war developments is expected to be shown in the data of the fourth quarter of 2022 and the first half of 2023. This outlook is reflected in the latest ECB projections for economic growth, which have been revised down markedly for the remainder of the current year and for 2023. At the September 2022 ECB forecast round the euro area real GDP growth is expected to reach 3.1% for 2022, 0.9% for 2023 and 1.9% for 2024. The euro area economy is now expected to grow by less than projected, with the possibility of a recession taking place in 2023 being more likely. Inflation started rising in 2021, due to demand and supply imbalances following the reopening of economies after covid-related restrictions were lifted and due to supply chain bottlenecks. But there was another unpredictable and bigger inflation shock from the Russian war in Ukraine that catapulted energy prices. Harmonized inflation in the euro-area rose to a high of 10 percent in September, up from 9.1 percent in August, indicating a continuing rising trend. Based on the September Eurosystem staff Broad  1/4  BIS - Central bankers' speeches  Macroeconomic Projection Exercise, both headline and core inflation are expected to be higher in 2022, at 8.1 per cent and 3.9 per cent, respectively.
The non-performing loan ratio has continued its downward trend and stands at 11.2  3/4  BIS - Central bankers' speeches  percent as at June 2022, with total non-performing loans amounting to € billion, which is the lowest level observed since 2014 when the definition was harmonised across the European Union. So far the first round effects from the geopolitical crisis have been manageable and of limited direct extend. Nevertheless, the second round effects are yet to be materialised. Adverse macroeconomic developments may weaken banks' profitability and deteriorate asset quality, causing delinquencies and an upward pressure on impairments and provisions. It is therefore important for banks to adapt their business models to the new realities as shaped by the consecutive crises. Challenges emerge through various channels. Intense competition, from entities not falling in the traditional banking spectrum, threat of additional provisions due to increased credit risk, the need to invest in digitalisation to streamline operations, and the costs of managing climate change and the transition towards a sustainable greener economy are among the challenges that the Cyprus banking sector faces. It is important to say that these challenges are not country specific to the banking system of Cyprus. They are challenges that are commonly faced by European banks. Especially the issues of digital transformation together with the management of climate risks and the transition to a green economy are key issues that should be on top of the agendas' of European economies and banks. They surely are on the top of the supervisory agenda.