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With some important exceptions, including the German manufacturing sector, economic activity seems to have held up a little better than we had feared so far in Q2. We don’t think this will last. The recent strength has been helped by the re-opening of …
7th June 2022
We forecast the SNB to largely shadow ECB rate hikes over the next 18 months or so, albeit allowing the interest rate differential with the euro-zone to widen from 25bps at present to 50bps by end-2022. But the balance of risks is skewed towards the Bank …
ECB will leave rates unchanged next week but raise rates by 50bp in July. Bank staff will revise inflation forecasts up , growth forecasts down . ECB to keep us (and itself!) guessing about design of anti-fragmentation tool. Members of the ECB Governing …
1st June 2022
Enough has been said elsewhere about how the leap in euro-zone inflation in May is making it difficult for the ECB, which will need to explain next week why policy rates are still negative. So in this Weekly we will turn our attention to how inflation is …
One is not amused by King Harald V’s luck With the UK gripped by Jubilee fever, it is worth pointing out that Sweden, Norway, and Denmark are also constitutional monarchies whose current rulers have been on the throne for decades. It is hard to compare …
A bright spot in an otherwise gloomy landscape The euro-zone unemployment rate remained at a record low in April and the latest business surveys suggest that employment will continue to increase at a decent pace. With the labour market remaining tight, …
Further jump in inflation clinches case for prompt ECB action With headline and core inflation rising more than expected yet again, the case for exiting from negative interest rates promptly is now irrefutable. The ECB looks sure to confirm next week that …
31st May 2022
Solid Q1 but activity will have softened in Q2 The stronger-than-expected increase in Swiss GDP in Q1 provides a solid base for year-on-year growth rates throughout 2022. But with surveys heading south, and signs of stagnation in the euro-zone in Q2, we …
Surging inflation boosts case for rapid rate normalisation German and Spanish inflation data for May provide more ammunition for those who will argue at next week’s monetary policy meeting that the ECB should exit negative interest rates promptly, rather …
30th May 2022
Sentiment still depressed The EC Economic Sentiment Indicator for May was almost unchanged from April, well below its pre-Ukraine war level and consistent with economic activity stagnating in Q2. The survey also suggests that inflationary pressures remain …
Nordics to follow ECB (following the Fed) The change to our ECB forecast this week (see here ) has big implications for Scandinavian central banks so we are now formally changing our projections for the Riksbank, Norges Bank and Nationalbank. (See Key …
27th May 2022
Contraction in Q2? The euro-zone PMI survey for May, published this week, suggested that the economy may fare a little better in Q2 than we had assumed. Indeed, the Composite index remained well above the 50 “no change” mark, leaving it consistent with …
The ECB’s guidance that it can use PEPP reinvestments to contain bond spreads has a few big limitations. If the forthcoming interest rate hikes cause spreads to blow out, the ECB will either need to change the rules governing its reinvestments or, more …
26th May 2022
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 …
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
