stability and financial stability in the euro area. the euro area banking sector is resilient, with strong capital and liquidity positions. in any case, our policy toolkit fully equips us to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy. economic activity 1 / 4 bis - central bankers'speeches growth in euro area gdp slowed progressively over the course of last year and stagnated in the fourth quarter. employment growth also slowed in 2022, but remained resilient in the fourth quarter despite the moderation in economic activity, while the unemployment rate remained at a record low level. survey data into the first quarter of this year suggested some improvement in activity and confidence in the first quarter of 2023. under the baseline scenario in the ecb staff projections ( which were finalised before the emergence of financial market tensions in mid - march 2023 ), the euro area economy looks set to recover over the coming quarters as the labour market remains strong, supply bottlenecks are resolved, and inflation moderates. risks to the growth outlook are tilted to the downside. persistently elevated financial market tensions could tighten broader credit conditions more strongly than expected and dampen confidence. russia's unjustified war against ukraine and its people continues to be a significant downside risk to the economy and could again push up the costs of energy and food. euro area growth could also be dragged down if the world economy weakened more sharply than expected. however, if companies can adapt more quickly to the challenging international environment, this, coupled with the fadingout of the energy shock, could support higher growth than currently expected. government support measures to shield the economy from the impact of high energy prices should be temporary, targeted, and tailored to preserving incentives to consume less energy. as energy prices fall and risks around the energy supply recede, it is important to start rolling back these measures promptly and concertedly. falling short of these principles can drive up medium - term inflationary pressures, which would call for a stronger monetary policy response. moreover, fiscal policies should be oriented towards making economies more productive and gradually reducing high public debt. finally, countries should implement structural policies for intensifying their efforts to green and digitalise their economies. inflation euro area headline inflation declined from its october peak, reflecting a drop in energy inflation. downward base effects, an easing of energy commodity prices, and the impact of government measures to shield consumers from high energy prices

all contributed to this decline. by contrast, food and core inflation rates continued to rise, partly as a result of the past surge in energy and other input costs still feeding through to consumer prices. pent - up demand related to the reopening of the economy and the lagged impact of supply bottlenecks also continue to push prices up. at the same time, employees demanding compensation for the loss in purchasing power amid tight labour markets has translated into higher wage growth, while many firms in sectors facing constrained supply and resurgent demand raised their profit margins. we expect euro area inflation to continue to fall, as lagged price pressures fade out and tighter monetary policy increasingly dampens demand. however, historically high wage growth, related to tight labour markets and compensation for high inflation, will support core inflation over the projection horizon, as it gradually returns to rates around our target. this outlook remains surrounded by considerable uncertainty, with both upside and downside risks. stronger than expected pipeline pressures or higher than anticipated increases in wages or profits could drive up inflation, while financial market 2 / 4 bis - central bankers'speeches tensions and falling energy prices could lead to faster disinflation. at the same time, most measures of longer - term inflation expectations currently stand at around two per cent, although they warrant continued monitoring. euro area banking sector, non - bank financial sector and financial stability euro area banks remain resilient in the current market environment thanks to strong capital and liquidity positions. since the start of the ecb's policy rate hiking cycle, euro area bank profitability has been boosted by higher interest margins, while the change in impairments and provisions has been rather muted so far. however, in the current environment of tightening financing conditions including for banks, credit risks have increased, and lending dynamics have substantially weakened, which may weigh on future bank profitability. the decrease in bank lending to firms has, in general, not been offset by an increased recourse of firms to market - based financing, despite a bout of corporate bond issuance in the fourth quarter of 2022. looking ahead, the decline in the asset purchase programme portfolio will increase the share of debt issuance that needs to be absorbed by investors. based on their past behaviour, investment funds appear able to absorb part of such an increase. at the same time, in spite of some reduction in exposure to higher - risk assets, structural vulnerabilities in the non - bank financial sector remain elevated. risks in that