As we head into a new year, Europe faces multiple challenges across inflation, energy and financial conditions, meaning investors will want to keep an eye on recession risk, the ECB, and European equities. Chief European Equity Strategist Graham Secker and Chief European economist Jens Eisenschmidt discuss.----- Transcript -----Graham Secker Welcome to Thoughts on the Market. I'm Graham Secker, Morgan Stanley's Chief European Equity Strategist.Jens Eisenschmidt And I'm Jens Eisenschmidt, Morgan Stanley's Chief European Economist.Graham Secker And on this special episode of the podcast, we'll discuss our 2023 outlook for Europe's economy and equity market, and what investors should pay close attention to next year. It's Monday, November the 28th, at 3 p.m. in London.Graham Secker So Jens, Europe faces multiple challenges right now. Inflation is soaring, energy supply is uncertain, and financial conditions are tightening. This very tricky environment has already impacted the economy of the euro area, but is Europe headed into a recession? And what is your growth outlook for the year ahead?Jens Eisenschmidt So yes, we do see a recession coming. In year-on-year terms we see negative growth of minus 0.2% next year. There's heterogeneity behind that, Germany is most affected of the large countries, Spain is least affected. In general, the drivers are that you mentioned, we have inflation that eats into real disposable income that is bad for consumption. We have the energy situation, which is highly uncertain, which is not great for investment. And we do have monetary policy that's starting to get restrictive, leading to a tightening in financial conditions which is actually already priced into markets. And, you know, that's the transmission lack of monetary policy. So that leads to lower growth predominantly in 23 and 24.Graham Secker And maybe just to drill into the inflation side of that a little bit more. Specifically, do you expect inflation to rise further from here? And then when you look into the next 12 months, what are the key drivers of your inflation profile?Jens Eisenschmidt So inflation will rise, according to our forecast, a little bit further, but not by an awful lot. We really see it peaking in December on headline terms. Just to remind you, we had an increase to 10.7 in October that was predominantly driven by energy and food inflation, so around 70% of that was energy and food. And of course, it's natural to look into these two components to see what's going to happen in the future. Here we think food inflation probably has still some time to go because there is some delayed response to the input prices that have peaked already at some point past this year. But energy is probably flat from here or maybe even slightly falling, which then gets you some base effects which will lead and are the main driver of our forecast for a lower headline inflation in the next year. Core inflation will be probably more sticky. We see 4% this year and 4% next. And here again, we have these processes like food inflation, services inflation that react with some lag to input prices coming down. So, it will take some time. Further out in the profile, we do see core inflation remaining above 2% simply because there will be a wage catch up process.Graham Secker And with that core inflation profile, what does that mean for the ECB? What are your forecasts for the ECB's monetary policy path from here?Jens Eisenschmidt We really think that the ECB needs to have seen the peak in inflation, and that's probably you're right, both core and headline. We see a peak, as I said, in December, core similarly, but at a high level and, you know, convincingly only coming down afterwards. So, the ECB will have to see it in the rear mirror and be very, very clear that inflation now is really falling before they can stop their rate hike cycle, which we think will be April. So, we see another 50 basis point increase in December 25, 25 in February, in March f