European Economics Weekly

European Economics Weekly

Energy, semi-conductors and Italy’s Green Pass

The continued high level of energy prices strengthens our view that euro-zone inflation will keep rising in the coming months. But by lowering consumers’ purchasing power, it could actually reduce inflationary pressure in the medium term. Meanwhile, data released this week added to the evidence that supply problems are weighing on German car manufacturers, and things are unlikely to get better any time soon. Finally, Italy’s new Green Pass requirement for workers came into force today, sparking protests at a number of ports. But so far the disruption seems to have been limited.

15 October 2021

European Economics Weekly

Energy costs soar, vehicle output slumps

Soaring energy costs are yet another headwind to the euro-zone’s economic recovery. That said, while the balance of risks has arguably shifted to the upside, we still think price pressures are likely to ease in the coming year or so, after which inflation will drop back below the ECB’s target. Meanwhile, supply shortages caused a collapse in German auto production in August and reports of car factory shutdowns elsewhere point to a very difficult end to 2021 for euro-zone industry.

8 October 2021

European Economics Weekly

“Transitory” inflation won’t spook the ECB

We have revised up our inflation forecasts this week and expect the surge in gas prices to keep inflation above the ECB’s target for longer than previously anticipated. Nonetheless, inflation looks sure to drop back early next year, and the ECB will not be following other major central banks in preparing to raise interest rates anytime soon. Meanwhile, we expect German industrial production and euro-zone retail sales data for August (due next week) to be underwhelming. But other parts of the economy should be holding up better.

1 October 2021
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European Economics Weekly

ECB rate hikes a distant prospect, Merkel era at an end

Even as other central banks hinted this week at a shift towards tighter monetary policy, we doubt that the ECB will follow suit. Meanwhile, the business surveys suggested that while supply-chain disruptions and rising input prices took the shine off the region’s recovery in September, GDP probably still grew very strongly in Q3. Next week brings the results of Germany’s federal election on Sunday and the start of probably lengthy coalition negotiations and the usual month-end raft of data.

European Economics Weekly

Wage growth to stay weak, inflation to keep rising

Data published this week highlight the challenge to euro-zone consumers from subdued pay growth and rising inflation. We expect inflation to keep rising in the coming months, and probably further than most expect. Next week, we will host a Drop-in webinar on the causes and effects of the recent surge in European gas prices.

European Economics Weekly

A look ahead to December’s ECB meeting

Following yesterday’s comments from ECB President Christine Lagarde, the Bank looks set to make crucial decisions about the future of QE at its December meeting. We suspect that it will end its net purchases under the PEPP next March, but increase the pace of APP purchases by more than most expect. Interest rates are also likely to remain on hold for longer than is priced into markets. Meanwhile, data from the UK suggest that Covid and shortages of both goods and labour are putting the brakes on the economic recovery there, but we remain cautiously optimistic about the euro-zone outlook.

European Economics Weekly

Inflation to rise further, but then fall

Inflation will rise further from the 3% level reached in August in the coming months, but we are confident that it will drop back sharply next year, as most measures of underlying inflation and wage pressures remain very low. Meanwhile, all eyes will be on the ECB Governing Council meeting next Thursday, when we expect policymakers to announce the start of a very gradual reduction in the Bank’s asset purchases.

European Economics Weekly

Business surveys point to continued recovery

The business surveys for August published this week provided some reassurance that the euro-zone economy is continuing to grow at a decent pace. And the decline in the forward-looking components is not too worrying since the pace of growth was always likely to tail off as the economy got closer to "normal". Next week, we expect flash inflation data for August to show big rises in the headline and core rates, due to base effects related to the timing of summer sales last year.

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