Filenews 2 June 2022
According to ING's baseline scenario, the eurozone will grow this year at a rate of 2.3% while it expects a recession in Germany in the third quarter of 1.4%, in Ireland of 1.5% and in the Netherlands in the fourth quarter (-0.1%), with the Netherlands also falling marginally into recession (0.1%) in the third quarter. For 2023, growth in the euro area will slow significantly to 1.6%, according to the Dutch bank, while GDP will move to 1.5% in 2024. Portugal is expected to record the highest growth rates this year in the eurozone, at 6%, followed by Spain at 4%.
On the inflation front, it is expected to remain unpleasantly high and in the short term there is unlikely to be a big respite for central banks, and the outlook for 2023 and 2024 is also covered by uncertainty. According to the estimates of the Dutch bank, inflation in Greece is expected to peak in the second quarter, while for the whole year it puts it at 8.1% from 7.1% it predicted a month ago, the highest among all countries in the eurozone. In 2023 it estimates that it will fall to 2.4% and in 2024 to 2%. At the same time, it puts inflation in the euro area at 6.4% this year, while in 2023 and 2024 it will fall to 2.5% and 2.2% respectively.
As ING notes, persistent headwinds are pushing the eurozone into a "muddling through" scenario, i.e. "seeing and doing" temporary solutions and hesitancy, and there is a high probability that the region will see a quarter of negative growth this year. However, persistent inflation and higher inflation expectations will force the European Central Bank to abandon negative interest rates in the third quarter.
Goodbye to negative interest rates
In a blog on the ECB's website, President Christine Lagarde presented the growing consensus that has been created in the Governing Council, namely that more persistent than expected inflation requires the swift lifting of unconventional policy measures. A first rate hike in July seems almost certain and a 50 basis point increase cannot be ruled out, especially if inflation is higher than expected ahead of the July meeting. In any case, as ING points out, negative interest rates will have disappeared in September. It now seems that the ECB wants to take advantage of the window of opportunity to normalise monetary policy. This requires policymakers to follow a fine line between rising inflation expectations and adverse economic winds.
Mixed data on the economy
The first quarter showed an upwardly revised growth rate of 0.3% quarter-on-quarter, but the second quarter looks more like a conundrum, the Dutch bank notes. There are no official economic data yet and the climate indicators do not give a clear picture. Since the start of the war in Ukraine, consumer confidence has fallen to levels of recession, with May's data showing almost no improvement. However, business confidence data remained better, while still declining.
The eurozone composite PMI reached 54.9, consistently above the 50's recession level. This is largely due to a strong service sector, which seems to be benefiting from some post-pandemic demand coverage. Indeed, holiday bookings have returned or are even above pre-pandemic levels. In the manufacturing sector, the slowdown is most evident due to renewed supply chain problems, higher input prices and falling orders.
Not exactly the golden 20s
As ING points out, there is still no clear weakening in the labour market, but wages, although rising a little faster now, are certainly not keeping pace with inflation. At the same time, oil prices have risen, further reducing the purchasing power of households. Therefore, the Dutch bank does not believe that consumption will be a strong driver of growth in the coming quarters. And businesses may also become more cautious in their investment plans.
Moreover, there still seems to be a willingness among governments to support the weakest households with fiscal measures. And as the European Commission has proposed extending the escape clause for the Stability and Growth Pact until 2023, much fiscal tightening should not be expected at the moment.
"We still believe that the second or third quarter of this year may see negative growth in the eurozone. Next, we believe that the growth pattern will largely be in 'muddling-through' mode. This will continue to result in GDP growth of 2.3% in 2022 and 1.6% in 2023. Not a recession, but not exactly the '20s either. And the risks will continue if they exist," ING stresses.
Higher inflation expectations
Ruling out a strong rise in gas prices amid fewer imports (or disruptions of supply) from Russia, inflation is likely close to its peak. In May, overall inflation rose to 8.1%. ING expects the decline to be very gradual and we may have to wait until the second half of 2023 before overall inflation retreats below 2% again. At the same time, consumers' longer-term inflation expectations are now on the rise, to 3%, in the most recent survey, which explains why the ECB wants to take interest rates out of negative territory very soon.
In an interview, Philip Lane, the ECB's chief economist, made it very clear that this should be completed by September. What happens next will depend on the data. ING does not believe that a wage-price spiral will develop, as in the most recent wage agreements the increase projected for 2023 is only 2.4%, below the 3% that the ECB considers to be in line with its 2% inflation target. So, logically, the ECB will want to get a little closer to the elusive "neutral interest rate".
Source: Capital.gr
