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.
Jessica Hinds Europe Economist
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European Economics Weekly

Rising Covid fears will keep policymakers dovish

It is too early to judge how serious the B.1.1.529 variant will turn out to be, but it certainly reinforces the case for central banks to be ultra-cautious when withdrawing their policy support. We now think that at its next meeting, the ECB will make clear that even if it intends to end net PEPP purchases in March, it stands ready to start them again if needed. That in turn should help to keep bond yields and spreads low. Meanwhile, we are braced for some “shock” inflation numbers next week, but they should mark the peak and inflation is likely to fall quite sharply next year.

26 November 2021

European Economics Update

PEPP not guaranteed to end in March

The account of October’s ECB meeting suggests that it is by no means guaranteed that net PEPP purchases will end in March. And even if they do, the Bank may well leave open the possibility of re-starting PEPP purchases later in 2022 if needed. Meanwhile, we agree with the ECB’s message that investors have got ahead of themselves by pricing in interest rates hikes for next year.

25 November 2021

European Data Response

German Ifo Survey (November)

The fall in the Ifo Business Climate Index (BCI) for November was in line with expectations and suggests that the German economy was struggling even before the recent tightening of Covid restrictions. Things will be much worse in December as coronavirus restrictions are tightened further.

24 November 2021

More from Jessica Hinds

European Data Response

Euro-zone Final PMIs (Sep.)

The PMIs are consistent with the euro-zone’s economic recovery losing some momentum as GDP approaches its pre-pandemic size and as supply shortages take their toll, especially in manufacturing. The surveys also show that price pressures are spreading to the services sector, even in parts of the periphery.

5 October 2021

European Economics Update

Risk of euro-zone labour market “cliff edge” very low

Euro-zone governments’ reduction in support for jobs will not cause unemployment in the region to jump, since there are now relatively few workers benefiting, and hiring activity is strong. But lingering spare capacity in the labour market means worker shortages are unlikely to become widespread.

30 September 2021

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.

24 September 2021
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