European Chart Book

European Chart Book

Headwinds strengthening

Supply shortages and rising energy prices are becoming stronger headwinds to the euro-zone recovery. The latest data from Germany showed sharp falls in industrial orders and production, with manufacturers citing supply bottlenecks as a constraint on output. These problems have hit the vehicle sector particularly hard, and in the September German Ifo survey more car producers expected conditions to deteriorate in the next six months than improve. Firms in the construction sector also seem to be struggling to source materials. Meanwhile, the recent huge increases in energy prices are adding to producers’ costs and at the same time pushing up consumer price inflation. While the timeliest business surveys remain consistent with the economy as a whole growing, and we think that supply problems will ease and energy prices fall next year, the risk of stagnation in the final months of this year is rising.

7 October 2021

European Chart Book

Rise in inflation is not over

Headline inflation came in higher than our above-consensus forecast in August and, at 3.0%, reached its highest level for a decade. It is likely to rise a bit further in the coming months: producer price inflation has risen recently and the price components of surveys such as the PMIs show that price pressures are still strong. However, we think inflation will drop even further than the consensus and ECB expects over the next two years. This is largely because we expect wage inflation to remain low, given that there is more slack in the labour market than before the pandemic and that the Phillips curve is flat. Although there are some signs that the recovery is losing momentum, this is inevitable as activity gets close to its pre-pandemic level. Against this backdrop we think the ECB is likely to dial down its emergency asset purchases slightly on Thursday and end them completely next March, but continue with its standard asset purchase programme for several years and leave the deposit rate unchanged for the foreseeable future.

6 September 2021

European Chart Book

Strong recovery to continue in Q3

The surge in spending as coronavirus restrictions have been lifted will bring the euro-zone economy close to its pre-pandemic level in the coming months. After expanding by 2% q/q in Q2, we expect a similar increase in Q3. Both business and consumer sentiment are strong and order books are full. High frequency mobility data also suggest that things are getting back to normal. The main exception is the tourist sector; although there has been a big increase in flight numbers in the past few weeks, it is still running well below normal levels. Meanwhile, inflation rose above 2% in July and there is mounting price pressure in supply chains, while producer price inflation reached double-digit levels and points to HICP inflation rising further in the coming months. That said, we are confident that inflation will drop back again next year to below the ECB’s 2% target.

4 August 2021
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European Chart Book

Activity taking off as hospitality reopens

The economy has continued to rebound strongly as governments have lifted almost all restrictions on retail and restaurants and eased rules on foreign travel. Restaurant bookings are back above pre-pandemic levels and the number of flights is rising steeply (no pun intended!). This rebound is likely to put a bit more pressure on inflation, which looks set to resume its upward course in the second half of the year after pausing in June. The latest statements from key policymakers suggest that the ECB is in no hurry to scale back its asset purchases, but we think the Governing Council will begin to taper its bond-buying in the coming months.

European Chart Book

Springing back to life…again

The economic outlook has brightened as the virus has subsided and governments have permitted people to return to the shops and restaurants as well as to travel a bit more freely. However, manufacturers are struggling to keep up with booming demand due to shortages of key inputs, and there are some signs that firms in the hospitality sector may struggle to fill vacancies immediately. These frictions may put some upward pressure on prices in the near term. After rising to 2.0% in May, we think the headline inflation rate will average around 2½% in the second half of the year although core inflation remains low. (See Chart 1.) The ECB is not likely to be fazed by these inflation numbers and, in our view, is right to worry more about under-shooting its target over the medium term. We expect the Bank to pare back its PEPP purchases only very gradually in the second half of the year.

European Chart Book

Vaccination pace finally picks up

After contracting again in the first quarter of this year, prospects for the second quarter have improved because the pace of vaccination has accelerated. At its recent pace, the euro-zone is on track to have vaccinated 70% of the adult population by July, a level it had previously aimed to achieve by September.  That should embolden governments to begin to lift restrictions in the coming weeks and this in turn should bring forward some of the pick-up in economic activity. We now think that GDP will increase by around 1% q/q in the second quarter. Meanwhile, despite a rise in headline inflation there is little sign that underlying inflationary pressure is building. We expect the ECB to keep to its current course and buy approximately €20bn of assets per week under its emergency programme (PEPP).

European Chart Book

Still waiting for a shot in the arm…

The euro-zone economy is doing better than many expected given that much of the hospitality and travel sector is still closed due to virus-related restrictions. Indeed, the latest business surveys suggest that manufacturing output is growing at a near-record pace. However, this rebound is from a very subdued level and the services sector is still hobbled by Covid-19 restrictions. Overall, we do not expect the euro-zone economy to expand at all in Q2. That said, despite multiple regulatory and logistical problems, the pace of vaccinations has picked up somewhat over the past month. Our best guess is that 50% of adults will have been vaccinated by the end of July. That would allow most restrictions to be lifted during the summer and would pave the way for a sustainable economic rebound.

8 April 2021

European Chart Book

Price pressures building

Euro-zone inflation looks set to rise sharply in the coming months as energy inflation shoots up and core inflation edges higher. Indeed, the PMI surveys suggest that manufacturing input prices are rising at their fastest pace in nearly a decade, which reflects movements in oil prices as well as a long list of input shortages, from steel to semiconductors. While the PMIs imply that firms aren’t fully passing those cost increases onto customers, some price increases seem likely. What’s more, when lockdowns are lifted, clothing and holiday prices – which fell particularly sharply last year – should rebound too. We think that all of this will drive headline inflation above 2% in the second half of the year. But since most of these effects should be temporary, we expect inflation to drop back to around 1% in 2022.

4 March 2021
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