But the uncertainty surrounding supply and demand dynamics requires us to remain prudent as regards how far the adjustment needs to go. And we should not ignore the fact that the tightening, which has followed from our decisions since the end of 2021 and from expectations of further adjustments in our stance, is already working its way through the economy – with the usual transmission lags. Estimates suggest that this tightening will on average subtract more than one percentage point from annual real GDP growth each year until 2024 compared to a counterfactual where interest rates and balance sheet expectations would have remained unchanged since December 2021. [26]  Conclusion Let me conclude. Inflation is high at the moment and the risks associated with this situation should not be underestimated. Monetary policy has to tighten to ensure that inflation does not become entrenched. But the impact of the current shocks on the output gap is clearly unclear. It would be misguided to base an aggressive tightening on assumptions which cannot be conclusively substantiated. The consequences of possible errors may not be perceptible today, but they would become evident over time. It may then be too late to fully reverse them. Annexes 14 November 2022 Slides    ENGLISH  1. Potential output can be defined as the highest level of economic activity that can be sustained by means of the available technology and factors of production, in particular labour and capital, without creating inflationary pressure.
The second explanation is that the pandemic and the war could have triggered or accelerated structural changes – such as deglobalisation or a more costly energy mix – which have permanently lowered potential output. In these circumstances, the economy could be overheating even though real GDP remains well below its pre-pandemic path (Chart 7). In other words, by lowering potential output the supply shocks could have created excess demand and hence a positive output gap, which would justify a more restrictive policy stance. Chart 7 Euro area real GDP (index 2014 = 100)  Sources: ECB staff macroeconomic projections and calculations. Distinguishing between these two possible explanations in real time is no easy task. Just as for the origins of the shocks, it requires a close look at the evidence. One way of doing this is by looking at output gap estimates. Estimates from major forecasting institutions show some dispersion, but point in a similar direction: they all foresee a negative output gap in 2023 that does not fully close in 2024 (Chart 8). [13] With regard to the current situation, estimating revisions of potential output in real time is tricky[14] but the latest European Commission estimates foresee potential growth at 1.2% in 2023 and 1.3 % in 2024, with the level of potential output in 2024 being 5.6% higher than in 2019.