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High inflation, record trade deficit

Data released over the past week revealed that the euro-zone recorded its first monthly current account deficit since 2012 and provided further evidence that underlying price pressures are building. We expect the latter to prompt the ECB to raise rates by 25bp, if not 50bp, in July. Next week, the PMIs and Ifo for May will provide more evidence that the euro-zone and German economies are at risk of recession. ECB Drop-In (24th May 10:00 ET/15:00 BST): Could the ECB deliver a hawkish surprise? Join economists from our Europe and Markets teams for a discussion about what to expect from the Bank’s tightening cycle, including the chances for a bumper hike in July or even an early move at next month’s meeting. Register now.  
Andrew Kenningham Chief Europe Economist
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European Economics Focus

Euro-zone core inflation will remain higher for longer

We are revising up our forecast for core inflation in the euro-zone because the labour market is tighter, demand stronger and inflation expectations higher than we had anticipated. Moreover, fiscal policy will be tightened only gradually and there are significant upside risks to commodity prices. We think the core rate will remain above 2% during 2023-2024, keeping pressure on the ECB to tighten policy.

27 June 2022

European Economics Weekly

US recession fears won’t deter ECB

Fears about a possible US recession have prompted investors to revise their ECB interest rate expectations down this week, but we have pushed ours up to show the deposit rate peaking at 2%. While next week we expect the euro-zone economic sentiment indicator to add to the evidence that growth slowed in June, we think that policymakers at the central bank will be more concerned by the inflation data, which look set to reach a new record high.

24 June 2022

European Data Response

German Ifo Survey (Jun.)

The renewed decline in the German Ifo Business Climate Index for June provides further evidence that weaker demand is starting to affect manufacturing output. With inflation set to remain high and the country’s gas supply looking increasingly precarious, the chances of the country falling into recession this year have risen considerably.

24 June 2022

More from Andrew Kenningham

European Economics Update

End of negative rates is nigh!

The account of the ECB’s April meeting shows that a lot of policymakers thought the criteria for rate hikes had already been met. Since then, the case for rate hikes has only strengthened. While not our central forecast, a 50bp hike in July is increasingly likely, and even a June hike is not out of the question.

19 May 2022

European Data Response

German Industrial Production (March)

The slump in output in March shows that the war in Ukraine is hitting manufacturers hard even before a ban on Russian energy imports has taken effect and before the ECB has raised interest rates. We think this is the start of a deep manufacturing downturn which is likely to drag the entire economy into recession.  

6 May 2022

European Chart Book

Inflation becoming more entrenched

The latest data suggest that the increase in inflation is becoming more broad-based and persistent. While headline inflation only edged up in April, the core measure jumped to 3.5%. A range of alternative measures of underlying inflation, including our own proprietary indicator, also rose sharply. Surveys suggest that businesses and households have been revising up their inflation expectations, and this is echoed in market-based measures of inflation expectations. All of this has prompted financial markets to come round to our view that the ECB will raise its deposit rate by 25bps in July and lift it to positive territory by the end of the year. We now see the risks to our forecast as tilted to the upside. Attention is soon likely to turn to how tighter monetary conditions will impact the real economy and whether they will cause an excessive widening of sovereign bond spreads. UK Drop-In (5th May 10:30 EDT/15:30 BST): Our UK Economics team are holding a special 20-minute briefing to discuss the latest MPC decision and what it means for their outlook for UK growth, inflation and BoE policy. Register now

5 May 2022
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