A recession has looked unavoidable for some time and we now think it will be deeper than most anticipate. Manufacturing output is already declining and services activity is slowing. What’s more, inflation is in double-digit territory and does not seem to have peaked. Admittedly, global supply chain difficulties have eased and shipping costs have collapsed, but in Europe shortages are still off the scale compared to pre-Covid times, and may even have got slightly worse in September. Moreover, business surveys show that companies plan to go on raising prices, and the labour market is still very tight. Against this backdrop the ECB has little choice but to tighten policy rapidly in the coming months but that in turn will further squeeze households’ disposable incomes.
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