The analysis assumes a drop in globalisation equal to half of that observed during the global financial crisis and a permanent, large fall of European firms’ participation in global value chains. See Le Roux, J. (2022), “How persistent supply chain disruptions could affect euro area potential output”, Economic Bulletin, Issue 1, ECB. 16. The analysis assumes a permanent increase by 40% of oil prices. See Le Roux, J., Szörfi, B. and Weißler, M. (2022), “How higher oil prices could affect euro area potential output”, Economic Bulletin, Issue 5, ECB. 17. These effects on potential output are not additive. 18. ECB staff analyses find that while participation rates of older workers have not yet returned to their prepandemic trend, they are now comfortably above their pre-pandemic level. This stands in stark contrast with the United States, where the participation of older workers has not recovered and may remain permanently below pre-pandemic levels. See Faria-e-Castro, M. (2021), “The COVID Retirement Boom”, Economic Synopses, No 25, Federal Reserve Bank of St. Louis, 15 October and Domash, A. and Summers, L.H. (2022), “How tight are U.S. labor markets?”, NBER Working Paper, No 29739, National Bureau of Economic Research, February. 19. See Panetta, F. (2022), op.cit. 20. Aikman, D., Drehmann, M., Juselius M. and Xing, X. (2022), “The scarring effects of deep contractions”, BIS Working Papers, No 1043, 3 October. 21. See Panetta, F. (2022), op.cit. 22. Aikman, D, Drehmann, M., Juselius, M. and Xing, X. (2022), op. cit. 23. Moreover, lower future growth could dampen the natural interest rate, r*.

[7] We have also seen firms react to the threat of shortages by ordering more and earlier than usual, which has in turn pushed up inflation along the pricing chain, a phenomenon known as the “bullwhip effect”. [8]  Chart 2 Decomposition of HICP inflation excluding energy and food (annual percentage changes and percentage points contributions)  Sources: Eurostat and ECB calculations. See Gonçalves, E. and Koester, G. (2022), “The role of demand and supply in underlying inflation – decomposing HICPX inflation into components”. Notes: Items affected by supply disruptions and bottlenecks comprise new motor cars, second-hand motor cars, spare parts and accessories for personal transport equipment, and household furnishings and equipment (including major household appliances). Items affected by the reopening of the economy comprise clothing and footwear, recreation and culture, recreation services, hotels/motels, and domestic and international flights. The latest observations are for October 2022 (flash) for HICPX and September 2022 for the rest. The nature of the shocks has also been blurred on the labour market side by governments’ policy response to the pandemic. It has shielded employment from swings in demand through job retention schemes. [9] And it has led to an increase in public sector employment (Chart 3), especially in healthcare and education. [10]  Chart 3 Euro area employment across sectors (index: Q4 2019 = 100)  Source: ECB staff calculations based on Eurostat data. Note: The latest observations are for the first quarter of 2022. As a result, the output and unemployment gaps are giving different signals today.