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Just as policymakers at the ECB are becoming more concerned about inflation expectations (see here ), the rise in expectations in Sweden is giving the Riksbank plenty to fret about too. The Bank’s preferred measure – gleaned from a survey of money market …
13th May 2022
Finland, NATO, and Russian gas supplies The fact that Russia is reportedly close to cutting off the supply of natural gas to Finland in retaliation for its intention to join NATO poses a risk for Finnish industrial firms that are most reliant on gas – …
The ECB’s hawkish conversion appears to be all but complete, with more officials this week joining the ranks of those calling for rates to rise in July – some more explicitly than others. Perhaps most notably, President Lagarde said on Wednesday that she …
Ukraine war weighing on production The decline in industrial output in March shows that the war in Ukraine is having a severe impact on manufacturers. With further Russian energy import bans looming and supply shortages remaining acute, we think this is …
Inflation at a 31-year high The stronger-than-expected increase in Swedish inflation in April was partly due to high energy and food prices but also because of broadening price pressures. We expect the core rate to remain above the Riksbank’s target for …
12th May 2022
The current bout of high inflation is influencing wage negotiations in the euro-zone and stronger pay growth this year seems all but guaranteed, reinforcing the ECB’s resolve to normalise policy. But as things stand, a wage-price spiral still looks …
11th May 2022
Policymakers at the ECB are becoming more concerned about inflation expectations, with professional forecasters, financial investors, consumers and firms all anticipating that the pace of price increases will continue to accelerate. This makes it more …
10th May 2022
ZEW indicator makes German recession look more likely The small rise in the ZEW measure of German investor sentiment in May left it still very low. And the current conditions index fell further, which is consistent with our view that the economy will …
Inflation pick-up brings 50bp hike in June on the table The stronger-than-expected increase in core inflation in April raises the chances that the Norges Bank will step up the pace of tightening at its next rate decision, in June. The increase in CPI …
We think the euro will eventually weaken further, falling to parity against the US dollar, as the euro-zone economy falters, the terms of trade shock from higher energy prices feeds through, and the global economic outlook continues to worsen. While the …
6th May 2022
Schlegel won’t rock the boat at the SNB The SNB announced this week that Martin Schlegel will succeed Fritz Zurbrügg as Vice-Chair of the Governing Board after Mr Zurbrügg retires at the end of July. Mr Schlegel is part of the furniture at the SNB, having …
Widening bond spreads a cause for concern We agree with investors that the ECB is likely to raise interest rates by 25bp in July. We first made the call in late March, when even the most hawkish members of the Governing Council were talking about hiking …
Ukraine war hitting hard 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 …
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 …
5th May 2022
As was widely expected, the Norges Bank left interest rates on hold at +0.75% today and all but confirmed that “the policy rate will […] be raised in June”. After June, we forecast two more rate hikes in 2022 and one per quarter next year, which would …
The prospect of tighter monetary policy in the euro-zone has raised the threat of a bigger sell-off in the region’s bond markets. If this happens, we think the ECB would ultimately intervene to prevent any lasting damage. But we doubt that it will agree …
4th May 2022
Chances of a contraction in Q2 growing The decrease in euro-zone retail sales in March is the first indication from official data that the war in Ukraine is weighing on consumption. With the final PMI surveys pointing to price pressures intensifying and …
Equilibrium real interest rates in the euro-zone appear to be below zero and lower than in most other advanced economies. We expect them to stay that way. While the ECB is likely to raise interest rates sooner and further than most economists expect, this …
3rd May 2022
The timeliest surveys show that supply problems faced by euro-zone companies have eased a little this year, but remain intense. This will continue to weigh on production and keep inflation high. Since the start of the year there have been signs that the …
Labour market looks tight The euro-zone unemployment rate fell to a new record low in March, and the latest business surveys suggest that employment will continue to increase at a decent pace. With the surveys also showing that the labour market is …
GDP to fall as inflation rises Data for Q1 published this week showed that the euro-zone eked out a 0.2% q/q expansion at the start of the year. However with economic conditions having worsened recently we think that GDP will post a small contraction in …
29th April 2022
Stefan Ingves would struggle to keep a secret Much of the analysis following the start of repo rate hikes by the Riksbank yesterday has pushed a narrative that the Bank’s messaging was more hawkish than expected and its decision to raise rates as a …
Stagflation risks building The small increase in euro-zone GDP in Q1 means that the region will avoid a technical recession in the first half of the year. But rising inflation and the fallout from the Ukraine war mean that GDP is likely to contract in Q2, …
We think that the Norges Bank will keep interest rates on hold, at +0.75%, next Thursday, before resuming its tightening cycle in June. We forecast one rate hike per quarter this year and next, which would leave rates at 2.50% by end-2023. But the balance …
28th April 2022
The cap on the wholesale natural gas price for the Iberian market will result in a bigger fall in energy inflation in Spain than we had previously expected. It might also dampen underlying price pressures, but the big picture is that core inflation will …
Small fall in energy inflation will not put ECB off rate hikes The further rise in headline inflation in Germany, and increase in the underlying rate in Spain, suggest that euro-zone inflation will come in around 7.4% in April. This will do nothing to …
As we had expected, the Riksbank finally bowed to economic logic in its April meeting by raising the repo rate, to +0.25%, and announcing that it will begin to shrink its balance sheet this year. While the Bank has spoken in the past of the need to tread …
Russia’s decision to suspend gas deliveries to Poland and Bulgaria from today because of a payments dispute will only strengthen the EU’s resolve to end its dependency on Russian gas, keeping gas prices historically high for months to come. The move also …
27th April 2022
The higher prevalence of renewables in the energy mixes than in most of Europe means the squeeze on incomes from higher gas prices will be less acute in Switzerland and the Nordics, and Norway even stands to benefit from elevated commodity prices. But as …
In our latest European Economic Outlook , we set out three non-consensus forecasts for the euro-zone. First, we think inflation will overshoot expectations this year. Second, the hit that this will deliver to spending power means that the economy is …
25th April 2022
Slight recovery in April but Q2 contraction still likely The Ifo survey for April was a little stronger than we had expected and suggests that the services sector in particular is growing rapidly. But the index is still well below its pre-Ukraine war …
The re-election of French President Emmanuel Macron gives him five more years to improve France’s economic potential and its public finances, with pension reform and the green transition central to his plans. But Le Pen’s greater vote share suggests he …
Overview – The war in Ukraine has delivered a shock to Europe just as it was coming out of the pandemic. Higher energy prices will keep inflation elevated, squeeze household incomes and dent business confidence. We think the euro-zone economy will do no …
22nd April 2022
We first said in late March that we thought the ECB was likely to raise rates as soon as July. This was because inflation had been higher than expected for several months in succession and we thought it would continue to surprise on the upside, while the …
Boom time for Salmon prices In an otherwise extremely quiet week for tier-1 macroeconomic data releases, the publication of weekly salmon price data from Statistics Norway stood out. In short, it’s boom time for the fishing industry. The export price of …
Services sector propping up activity, but for how long? The rise in the euro-zone Composite PMI in April suggests that the services sector rebound from the Covid restrictions earlier in the year is offsetting weakness in the manufacturing sector. But with …
Consumption to be a significant drag on growth The rise in consumer confidence in April was slightly better than expected. Nevertheless, confidence is still very low and points to household spending falling in April. That’s consistent with our assumption …
21st April 2022
Having so far been a bastion of dovishness amongst G10 central banks, we think that the stage is set for the Riksbank to start to raise the repo rate next Thursday, and it will press on with further rate rises thereafter. But with “QT” likely to do some …
Inflation hasn’t peaked yet Headline inflation rose to 7.4% in March and further increases are likely. This will put a big dent in consumer spending, so we think that 2022 will be a year of stagflation for the euro-zone. Data released this morning showed …
A win for Marine Le Pen would need to be followed by a strong showing for her party in June’s legislative elections if she is to implement most of her programme. A government of national unity or “cohabitation” would clip her wings, at least on domestic …
20th April 2022
ECB President Christine Lagarde suggested at today’s post-meeting press conference that the Bank would be sticking to its plans for policy normalisation, despite inflation surprising to the upside since the last meeting. She highlighted the hit to …
14th April 2022
Today’s ECB statement and press conference indicate that policymakers expect to end their net asset purchases early in Q3 and raise interest rates soon after that. With inflationary pressures still rising, we think they will lift the deposit rate sooner, …
Price pressures building This week brought March inflation releases from Norway, Denmark and Sweden. Norway’s inflation data were a little weaker than expected, with the headline rate at 4.5% and the core rate unchanged at 2.1%. (See here .) Those …
Inflation at a 31-year high The stronger-than-expected increase in Swedish inflation in March is likely to give more ammunition to the hawks in the Riksbank, and lends support to our view that the Bank will start to raise the repo rate and press ahead …
Mounting signs of stagflation Final inflation data for Germany in March and the first survey of economic sentiment for April underline the acute problems which the German economy now faces. Energy inflation and underlying price pressures are rising even …
12th April 2022
A solid result for incumbent Emmanuel Macron in yesterday’s first round of the French presidential election has helped to allay fears of a Le Pen presidency. But the latest polls still point to a very tight race and the momentum is still with Marine Le …
11th April 2022
Lower-than-expected inflation won’t stop Norges Bank hiking Although headline and core inflation came in below expectations in March, underlying price pressures are likely to push both measures up a bit in the coming months. Meanwhile, the Norges Bank is …
A full embargo on Russian energy would force Germany to ration gas supplies to its most gas-intensive companies. This would have unpredictable knock-on effects which would cause a recession. While the short-term fallout for the wider economy would be …
8th April 2022
Flodén dials up the hawkishness While Anna Breman recently vented her hawkish views at a bunch of students (see here ), Martin Flodén treated a roomful of finance types to a rousing monetary call to arms this week. (See here .) (Recall that Mr Flodén and …
The latest surveys suggest that the euro-zone economy was still growing at a decent pace in March but that firms, consumers and investors expect much worse to come. Table 1 shows some of the timeliest survey indicators immediately before the euro-zone’s …
