Europe

European Economics Weekly

Euro-zone GDP barely grew in Q4, inflation risks rise

Data released this week suggest that our assumption that euro-zone GDP rose by 0.2% in Q4 could be too optimistic, but we still think that the economy will grow in Q1. Meanwhile, rapid house price inflation adds to the case for the ECB to, in Jay Powell’s words, start thinking about thinking about raising interest rates.

14 January 2022

European Data Response

German GDP (2021)

Provisional data showing that Germany’s GDP increased by 2.7% last year and news that it shrank in Q4 underlines that its recovery has lagged many of its peers, including the US, France and the UK. We think that German GDP will expand by less than the consensus expects this year too.

14 January 2022

European Economics Update

ECB likely to raise rates to zero in 2023

With pandemic-related inflationary pressures proving a bit more intense and persistent than we had anticipated, and policymakers sounding more willing to tighten policy, we think the ECB is most likely to end net asset purchases in December 2022 and raise its deposit rate to zero by end-2023. Drop-In: Neil Shearing will host an online panel of our senior economists to answer your questions and update on macro and markets this Thursday, 13th January (11:00 ET/16:00 GMT). Register for the latest on everything from Omicron to the Fed to our key calls for 2022. Registration here.

12 January 2022

Key Forecasts

Main Economic & Market Forecasts

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

Latest

Q3 2021

Q4 2021

Q1 2022

Q2 2022

2020

2021

2022

2023

GDP

+2.2(+3.9)

+2.2(+3.9)

+0.2(+4.4)

+0.5(+5.1)

+1.2(+4.0)

-6.5

+5.1

+3.5

+1.7

Household Spending

+4.1(+2.5)

+4.1(+2.5)

+0.0(+5.6)

+0.6(+8.8)

+1.5(+6.3)

-8.0

+3.4

+5.3

+2.0

HICP (%y/y)

+5.0 (Dec)

+2.8

+4.6

+4.1

+3.9

+0.3

+2.6

+3.0

+1.5

Unemployment Rate (%)

7.2 (Nov)

7.5

7.4

7.5

7.1

7.9

7.8

7.3

7.0

Depo Rate, end period (%)

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

0.00

10yr Bund Yield, end period (%)

-0.07

-0.20

-0.18

-0.07

+0.03

-0.57

-0.18

+0.25

+0.50

$/euro, end period

1.15

1.14

1.14

1.13

1.11

1.22

1.14

1.08

1.05

£/euro, end period

0.83

0.85

0.84

0.84

0.85

0.89

0.83

0.82

0.81

Sources: Bloomberg, Capital Economics


Euro-zone GDP barely grew in Q4, inflation risks rise

European Economics Weekly

19 January 2022

Our view

The economic recovery is slowing sharply as GDP has got close to its pre-pandemic level and persistent supply shortages, high energy prices and an increase in Covid infections are taking a toll on activity. After expanding by 2.2% q/q in Q3, we expect the economy to grow by only around 0.2% q/q in the fourth quarter, and Q1 is likely to be weak too. Meanwhile, we think that headline inflation has probably peaked at nearly 5% and will fall sharply next year. We expect inflation to remain above target until at least the end of next year. But after the temporary pandemic-related forces pushing up inflation have faded, we think it is more likely to settle below 2% than above it. The ECB looks set to end net asset purchases under the PEPP in March but leave the door open to re-starting them if needed. We also think it will increase the pace of the Asset Purchase Programme from €20bn to €40bn per month, and leave interest rates unchanged for much longer than investors anticipate. So while we expect bond yields to drift up over the coming years, they will remain very low.

Latest Outlook

European Economic Outlook

Running into troubled waters

Supply chain problems will slow the recovery and keep inflation above target until around the middle of next year. Beyond that, however, the economy should get back on track. After regaining its pre-crisis level later this year, output is likely to converge with its pre-pandemic trend. Meanwhile, we do not expect significant second-round effects from the recent surge in prices and think wage increases will remain quite modest. Headline inflation is likely to drop back below the ECB’s target by the end of next year, as energy inflation turns negative. So while the ECB will end its emergency PEPP purchases next March, it will step up its regular asset purchases and leave the deposit rate at -0.5% until around 2025, which is a lot later than financial markets anticipate.

19 October 2021