Europe

European Economics Weekly

Wage growth to stay weak, inflation to keep rising

Data published this week highlight the challenge to euro-zone consumers from subdued pay growth and rising inflation. We expect inflation to keep rising in the coming months, and probably further than most expect. Next week, we will host a Drop-in webinar on the causes and effects of the recent surge in European gas prices.

17 September 2021

European Data Response

Euro-zone Final HICP (Aug.)

Rising costs – from shipping to energy – are likely to push euro-zone inflation up even further in the coming months. They might also mean that it doesn’t fall quite as quickly next year as we currently assume. But by the end of 2022, we still suspect that inflation will be a long way below the ECB’s target.

17 September 2021

European Data Response

EZ Hourly Labour Costs (Q2) & Ind. Prod. (Jul.)

The sharp fall in euro-zone average hourly labour costs in Q2 compared to a year earlier was mainly due to pandemic-related distortions to the data that will continue to muddy the picture for another couple of quarters. Nevertheless, the spare capacity in the labour market will keep wage growth subdued.

15 September 2021

Key Forecasts

Main Economic & Market Forecasts

%q/q(%y/y) unless stated

Latest

Q2 2021

Q3 2021

Q4 2021

Q1 2022

2020

2021

2022

2023

GDP

+2.2(+14.3)

+2.2(+14.3)

+2.3(+3.9)

+1.4(+5.7)

+0.9(+6.9)

-6.5

+5.4

+4.5

+1.5

Household Spending

+3.7(+12.6)

+3.7(+12.6)

+3.8(+2.1)

+2.0(+7.5)

+1.2(+11.1)

-8.0

+3.9

+6.8

+1.9

HICP (%y/y)

+3.0 (Aug)

+1.8

+2.8

+3.5

+2.2

+0.3

+2.3

+1.5

+0.8

Unemployment Rate (%)

7.6 (July)

8.0

7.5

7.3

7.1

7.9

7.8

7.0

6.8

Depo Rate, end period (%)

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

10yr Bund Yield, end period (%)

-0.29

-0.20

-0.20

-0.25

-0.20

-0.57

-0.25

0.00

+0.25

$/euro, end period

1.18

1.19

1.16

1.15

1.15

1.22

1.15

1.15

1.20

£/euro, end period

0.85

0.85

0.85

0.85

0.85

0.89

0.85

0.85

0.86

Sources: Bloomberg, Capital Economics


Wage growth to stay weak, inflation to keep rising

European Economics Weekly

19 September 2021

Our view

Daily Covid infections are falling without governments implementing tighter restrictions, and there is little evidence that concerns about the virus are damaging economic activity. So the euro-zone economy looks set to continue rebounding strongly. GDP increased by 2.0% q/q in Q2 and is on track to post a similar rise in Q3 too. Meanwhile, inflation is likely to rise further above 3% in the coming months as pipeline pressures and some re-opening effects lift prices. That would be much lower than the peaks we expect in the US and UK, and we also expect euro-zone inflation to drop back sharply in 2022 to well below the ECB’s new 2% target, partly because wage growth will remain subdued. The ECB is likely to phase out its emergency asset purchase programme early next year but step up purchases under its Asset Purchase Programme instead. So while we expect bond yields to drift up over the coming years, they will remain very low.

Latest Outlook

European Economic Outlook

Strong rebound and temporary rise in inflation

The euro-zone is on the way to an almost full recovery. We expect Germany to regain its pre-pandemic level of activity later this year and the tourist-dependent southern countries to do so next year. The Delta variant may lead to some voluntary social distancing or self-isolating and perhaps limited restrictions over the winter, but we doubt that it will derail the recovery. Inflation will rise further than most expect in the coming months due to rising input costs and supply bottlenecks. But with wage agreements and inflation expectations remaining low, it will drop back and stay lower than most expect over the medium term. The ECB is likely to step up its standard Asset Purchase Programme substantially when its emergency purchases end next March and leave its deposit rate at -0.5% until beyond 2025, which is much later than investors expect.

16 July 2021