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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.

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