The euro-zone appears to have lost some momentum and is likely to remain sluggish in the coming quarters. The core economies are the weakest, led by Germany which is probably in another technical recession and which faces major structural challenges. In contrast, Spain will outperform, thanks in part to rapid immigration, and prospects for Portugal and Greece are fairly bright. Meanwhile, headline inflation looks set to fall well below 2% next year but services inflation will come down more gradually amid a tight labour market. Against this backdrop, we think the ECB will reduce its key policy rate by 25bp every three months until it has fallen to 2.5% in the second half of next year.
Elsewhere, the Riksbank will respond to economic weakness in Sweden by cutting interest rates by a 100bp to 2.5%; Norges Bank will cut rates faster than its own policymakers forecast; and the SNB will cut its key rate by a further 50bp to counter upward pressure on the franc.
Note: We’ll be discussing key takeaways from this report, including the scope of Germany’s downturn, in a Drop-In on Tuesday, 24th September. Register here for the 20-minute online briefing.
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