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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 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 …
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 …
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 …
23rd May 2022
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
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 …
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 …
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 …
19th May 2022
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 …
18th 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, …
17th May 2022
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
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 …
