Recovery slowed by supply chain problems

Economic growth has slowed sharply as output approaches its pre-pandemic level. We think that GDP will probably increase by only around 0.5% q/q in the final quarter, down from 2.2% in Q3. Manufacturing firms in Germany are struggling more than most and a large majority of them are reporting shortages of materials. At the same time, price pressures have continued to increase, with both the input price and output price components of the euro-zone Composite PMI reaching record highs in October. The euro-zone inflation rate reached 4.1% in October and is likely to edge up a bit further before year-end. However, it should then fall over the course of 2022 as energy inflation declines. The ECB is likely to leave its key policy rate unchanged at -0.5% throughout next year, and probably well beyond that, as it will continue to judge that the increase in inflation will prove transitory.