We suspect that GDP increased by only 0.1% in the first quarter of this year. The divergence between the manufacturing and services sectors has, if anything, increased, and this in turn has exacerbated the gap in performance between countries. Germany is flirting with recession while Italy’s economic contraction has continued. In contrast, activity in both France and Spain is holding up much better. Employment has continued to increase but at a slowing pace, and business surveys show that the labour market is cooling. With this in mind, we are sceptical of the ECB’s view that core inflation will rise steadily over the next year or two. Accordingly, we suspect that further policy stimulus will be needed.
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