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.
Andrew Kenningham Chief Europe Economist
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European Economics Weekly

ECB’s line on inflation contrasts with the Fed’s

In contrast to those at the US Fed, ECB policymakers are not ready to retire their argument that the current bout of high inflation is temporary. This reflects the significant difference in inflationary pressures between the two economies. Next week, we will get the detailed breakdown of November’s German inflation data, which will shed more light on the stronger-than-expected outturn. Meanwhile, with less than two weeks to go until December’s ECB meeting, the Governing Council appears to have reached a consensus on some aspects of its asset purchase programmes. But comments from Christine Lagarde today suggest that it will avoid making any long-term commitments.

3 December 2021

European Data Response

Euro-zone Retail Sales (Oct) & Final PMIs (Nov.)

Euro-zone retail sales have levelled off since June, but rising Covid cases and the return of restrictions are likely to weigh on sales and other components of consumption in the coming months.

3 December 2021

European Data Response

EZ Unemployment (Oct.)

While labour market conditions continued to improve in October, the recent deterioration of the Covid situation and increased uncertainty due to the Omicron variant are likely to mean the recovery takes a breather over the next couple of months, just as it did when restrictions were in place at the start of 2021.

2 December 2021

More from Andrew Kenningham

European Data Response

German Ifo Survey (October)

The fourth successive monthly fall in the Ifo Business Climate Index provides more evidence – if it were needed – that supply side disruption is causing the German economy to slow sharply and suggests that the problems are extending beyond manufacturing. We expect the economy to do no more than tread water in the last three months of the year.

25 October 2021

European Economics Weekly

A fresh start for the Bundesbank?

Other than Mr Weidmann’s abrupt departure from the Bundesbank, the news this week has been dominated by the twin problems of rising inflation and slowing economic growth. There is more bad news to come, including a further increase in inflation in October (data due next Friday). However, the ECB is sure to leave its policy unchanged at next Thursday’s monetary policy meeting and will reiterate its view that the inflationary pressures will be largely transitory. We agree with this, but there are growing risks that the increase in inflation will be larger and last longer than either we or the ECB are currently forecasting.

22 October 2021

ECB Watch

ECB insisting that inflation is largely transient

Nobody expects the ECB Governing Council to make any policy changes at next week’s monetary policy meeting. However, Christine Lagarde will address concerns about rising inflationary pressures and we expect her to reiterate that, even if they are stronger than anticipated, they are likely to prove temporary. She will probably also stress that the ECB’s current guidance implies that rate hikes are further away than suggested by financial markets. Otherwise, the focus will be on when and how to end the PEPP, decisions on which are scheduled for December.

21 October 2021
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