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With inflationary pressures remaining intense and policymakers keen to get the deposit rate out of negative territory, we now think the ECB is most likely to raise rates by 50bp in July and by 125bp in total this year. That said, we still think the …
26th May 2022
The consensus among professional forecasters is that house price growth will slow but remain positive over the coming years, as a robust jobs market prevents forced sales. But even in the absence of financial distress, we think that a decline in prices is …
Despite the backdrop of inflation at 70% and the lira falling by falling by 10% against the dollar this month, Turkey’s central bank left interest rates on hold at 14.00% today. So long as President Erdogan is in power, rate hikes will remain off the …
If we are right in expecting inflationary pressure to stay strong even as the economy gets dangerously close to a recession, then the prices of gilts and UK equities will probably fall further over the next year. Our forecast that the Bank of England will …
Exports from Central and Eastern Europe (CEE) face growing headwinds, and this feeds into our below consensus view on economic growth in the region. The larger economies in CEE such as Poland and Hungary are particularly exposed to slower growth in the …
25th May 2022
We held a Drop-In today to discuss our views on the ECB and what the chances are of a further hawkish surprise in the coming weeks. (You can see an on-demand recording here .) This Update answers several of the questions that we received, some of which we …
24th May 2022
We think “risky” assets will continue to struggle over the next year or so, even if a recession is avoided in most major developed markets (DMs) . Risky assets, which had already come under significant pressure earlier this year, have continued to …
We estimate that euro-zone households’ debt interest payments will quadruple as a share of income over the next couple of years as the ECB raises its policy rate. This will put yet further strain on households which are already struggling with higher …
Activity stalling, but inflationary pressures remain acute The flash PMI survey for May suggests that economic growth has slowed to a crawl and that the risk of a recession has not gone away. Even so, weakness in the economy doesn’t seem to be filtering …
Temporary factors buoying euro-zone activity The small fall in the euro-zone Composite PMI in May suggests that activity is holding up better than we had feared. But the services rebound is likely to run out of steam amid high inflation and the drop in …
The recovery continued in the Scandinavian and Swiss economies and their property markets in Q1. It was a record first quarter for investment in Scandinavia. And annual capital value growth was robust for office and industrial, while retail values …
Changing economic winds may prevent the Chancellor from going big The economic wind that has recently been blowing the public finances to undershoot forecasts adds more pressure on the Chancellor to launch in the coming weeks a big package of measures to …
The recent tightening of export restrictions has been limiting the supply of staple agricultural commodities available to global markets and pushing up prices. In light of the ban on wheat exports from India, we’ve raised our forecast for the price of …
23rd May 2022
In this Update , we answer a number of key questions on Russia’s public finances, including the likelihood of a sovereign default, the impact of higher energy prices and the collapse of the economy on the budget position, and how the government would be …
The Bank of Israel (BOI) hiked its policy by a larger-than-expected 40bp today, to 0.75%, and the backdrop of a strong economy, tight labour market and mounting inflation pressures means that we think it will deliver further hikes at its upcoming …
Stronger than feared but economy still struggling The Ifo survey for May suggests that activity in Germany may be holding up a little better than we had feared. But the headline Business Climate Index is still consistent with GDP contracting in …
Soft start to Q2 April’s activity data for Poland suggest that the economy lost some steam at the start of Q2 and the effects of the war in Ukraine will remain a key headwind over the coming months. That said, we think Poland will avoid a contraction and …
Consumer confidence remains depressed The small increase in euro-zone consumer confidence in May left it only slightly higher than its low point at the start of the pandemic. With confidence extremely low and real incomes squeezed by high inflation, we …
20th May 2022
Overview – The worsening monetary outlook is expected to weigh on property performance. With inflation set to peak at 10% y/y that will force interest rate to 3.0% next year. This will reverse the recent momentum in the commercial property sector, as …
Hungary: policymakers seek to fight imbalances Officials in Hungary sought this week to reassure investors that they will tackle inflation and mounting macro imbalances. Tighter policy is needed, which underpins our below-consensus growth forecasts. In a …
This week’s news on the euro-zone economy has continued to be pretty gloomy. Admittedly, there was a small upward revision to Q1 GDP (to 0.3% q/q) which means the economy will not fall into a technical recession in the first half of the year. And …
Another week, another set of target-busting inflation figures, with CPI inflation shooting up from 7.0% in March to a 40-year high of 9.0% in April. (See here .) In contrast, the rise in the euro-zone was smaller, with inflation ticking up from 7.4% in …
50bp is the new 25bp? It was a quiet week on the data front, but we had plenty of comments and speeches from policymakers to pick through – notably from three of the members of the Riksbank’s Executive Board. Deputy Governors Henry Ohlsson and Martin …
History suggests that the surge in energy prices over the past year means there is a good chance that the euro-zone will suffer a recession in 2022. It also suggests that it will be tricky for the ECB to tighten monetary policy without causing a recession …
Signs of resilience The unexpectedly strong rise in retail sales in April suggests the cost of living crisis hasn’t caused consumer spending to collapse and means the economy may have a little more momentum than we previously thought. It also supports our …
Record high rental growth at the start of the year is likely to mark a peak given signs that tenant demand is starting to ease. But strong wage growth and the rising cost of buying as mortgage rates rise mean rental growth is set to ease rather than …
19th May 2022
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 …
The war in Ukraine will exacerbate two key macro risks in Central and Eastern Europe (CEE) this year: wage-price spirals (particularly in Poland) and widening current account deficits (particularly in Hungary and Romania). Monetary policy will do most of …
The recent collapse in consumer confidence to a near-record low has added to the probability that the UK experiences a recession this year. But households’ large stock of savings and the tightness in the labour market means that weak confidence may not …
CEE economies and property markets started the year on a solid footing. Strong quarterly increases in office and industrial rents supported CEE all-property values in Q1, though yield compression slowed. (See Chart 1.) However, rental growth is likely to …
Q1 resilience to be followed by steep downturn in Q2 The 3.5% expansion in Russia’s GDP in Q1 is consistent with a small contraction in q/q terms, and this will almost certainly be followed by a steep fall in output in Q2 as the effects of Western …
18th May 2022
Net capital outflows from EMs appear to have picked up over the past few weeks amid the general risk-off mood in global financial markets. This is a worrying development for countries with fragile external positions, notably Turkey and some smaller …
Inflation close to a peak but will stay well above target for a long time April’s inflation data will confirm to policymakers – if any further evidence was needed – that they want to start raising interest rates very soon. A hike in July looks a near …
Euro-zone commercial property values made further gains in Q1. Quarterly rental growth was strongest for industrial, though office and retail rents also rose. However, the pace of yield compression reduced, limiting capital value growth. (See Chart 1.) …
Worse to come as inflation may yet climb to 10% If the rise in CPI inflation from 7.0% to a 40-year high of 9.0% in April wasn’t bad enough, inflation will probably rise further to 10% in October and will then fall back to the 2% target only slowly. …
We estimate that a rise in Bank Rate from 0.10% last November to a peak of 3.00% would mean that GDP is around 2.0% lower than if Bank Rate had stayed at 0.10%. That is a smaller drag than the Bank of England has incorporated into its forecasts. We do not …
17th May 2022
Bright labour market, weaker activity The euro-zone economy grew slightly faster in Q1 than previously estimated and there was a solid increase in employment at the start of the year too. While we expect the labour market to remain a relative bright spot, …
Overheating in Q1 Q1 GDP figures for Central and Eastern Europe smashed expectations in Poland, Romania and Hungary and suggest that their economies were running hot at the start of the year. The war in Ukraine will dampen activity in Q2, but demand is …
Still tightening even as economy slows Even though the economy contracted in March and may be on the brink of a recession, jobs growth strengthened, the unemployment rate fell to a 47-year low of 3.7% and wage growth accelerated. This supports our view …
The ECB’s rate hikes in 2011 were a mistake, not just because they exacerbated the widening in peripheral bond spreads. Underlying inflation was subdued and policymakers were too concerned with acting pre-emptively to contain inflation expectations. They …
16th May 2022
The UK government’s plan to use domestic legislation to overwrite parts of the Brexit Northern Ireland Protocol risks creating another headwind for the economy and exacerbating price pressures at a time when CPI inflation is on the cusp of rising to a …
Q1 contraction not a sign of weakness The 1.6% q/q annualised contraction in Q1 GDP in Israel was weaker than analysts expected, but it was more or less in line with our forecast and doesn’t change the bigger picture that Israel’s economy is operating in …
Monthly price increases slow sharply as ruble appreciates Russian inflation came in broadly as expected in April, rising from 16.7% y/y to a two-decade high of 17.8% y/y and it looks like further increases in the coming months will be modest. This will …
13th May 2022
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 …
Gas supply concerns remain The threat of gas supplies from Russia being cut off continued to rise this week. First, Ukrainian pipeline operator GTSOU suspended the flow of gas through the Sokhranivka transit point, which could reduce gas supplies to …
While our central forecast remains that euro-zone “peripheral” spreads will rise only a bit between now and the end of 2022, we think that the risk of a significant increase in spreads has risen . Notwithstanding a tick-up today, the yield spreads of …
One of the unforeseen consequences of the homeworking revolution is its negative impact on city centre retail footfall. The evidence suggests that in urban centres there is a link between higher levels of remote work and poorer retail performance, which …
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 …
Following the 0.1% m/m fall in GDP in March , we now think the economy is halfway towards a recession (two quarters of falling output in a row). (See here .) If GDP was flat in April, May and June, then it would be 0.1% lower in Q2 relative to Q1. We’ve …
