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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 Data Response

Euro-zone Industrial Production (Aug)

The large decline in euro-zone industrial production in August was largely due to supply shortages affecting production, particularly in the German auto sector. While demand is still strong, prolonged supply shortages and high input prices suggest manufacturing will continue to struggle in Q4.

13 October 2021

European Economics Update

“Underlying inflation” still weak

Core inflation in the euro-zone rose to 1.9% in September, its highest level in nearly 13 years, but other measures of underlying inflation are much lower. This supports our view that when the temporary forces pushing up inflation have faded, the core rate will settle well below the ECB’s target.

12 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 Chart Book

Headwinds strengthening

Supply shortages and rising energy prices are becoming stronger headwinds to the euro-zone recovery. The latest data from Germany showed sharp falls in industrial orders and production, with manufacturers citing supply bottlenecks as a constraint on output. These problems have hit the vehicle sector particularly hard, and in the September German Ifo survey more car producers expected conditions to deteriorate in the next six months than improve. Firms in the construction sector also seem to be struggling to source materials. Meanwhile, the recent huge increases in energy prices are adding to producers’ costs and at the same time pushing up consumer price inflation. While the timeliest business surveys remain consistent with the economy as a whole growing, and we think that supply problems will ease and energy prices fall next year, the risk of stagnation in the final months of this year is rising.

7 October 2021

European Economics Update

ECB growing more uncertain about inflation outlook

The account of September’s ECB meeting revealed many policymakers believed that inflation may stay higher for longer than the Bank’s projections show. Recent developments have added to the upside risks.

7 October 2021

European Economics Update

Can Europe keep the lights on?

The extraordinary rise in European gas prices in recent weeks has raised the possibility that, as a last resort, European governments may need to ration the supply of electricity to businesses or households. The economic impact of rationing would depend on how deep and long the cuts were, but under plausible assumptions, a few months of power reductions could easily wipe 0.5% off quarterly euro-zone GDP.

7 October 2021

European Data Response

German Industrial Production (August)

The whopping 4.7% m/m fall in German manufacturing production in August left industrial output 9.0% below its February 2020 level. With conditions having worsened since then, Germany’s manufacturing problems threaten to keep overall economic activity well below its pre-pandemic level until next year.

7 October 2021

European Data Response

Euro-zone Retail Sales (Aug.)

August’s euro-zone retail sales data suggest that consumer spending on goods is flatlining. But overall consumption is still likely to have grown fairly strongly in Q3 as spending on services increased.

6 October 2021

European Economics Update

Changing HICP weights add to inflation uncertainty

Changes to the weights applied to the goods and services in the inflation basket pushed inflation up in January, but since April the new weights have kept the headline rate lower than it would otherwise have been. The impact of next year’s changes in January is uncertain, but over the course of 2022 they are likely to mean that inflation falls a little more quickly than it otherwise would have done.

5 October 2021

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