Economists from Societe Generale emphasize that growth in the euro zone almost stalled in the first quarter, with GDP at 0.1% quarterly and feeble confidence indicators. They argue that the risk of deterioration in economic growth is rising, even though overall inflation is expected to continue to rise. They maintain expectations for increases in European Central Bank (ECB) interest rates in June and September, but believe that the market valuation of three increases is excessive.
The risk of growth increases as inflation increases
“Eurozone growth in the first quarter, at 0.1% q/q, was close to stagnating. It is, of course, much too early to see the impact of the Iran war. The few hard data we have, particularly for France, do not show a clear, direct impact on consumption (real spending on non-energy goods rose decently in March compared to a year earlier).”
“On inflation, headline inflation was 3% year-on-year in April, up from 2.6% earlier, driven by higher energy prices, while core inflation eased slightly to 2.2%. We expect headline inflation to peak at 3.7% in January 2027, while core inflation could peak at around 2.7% a little later, with a limited second-round impact on wages.”
“Three ECB surveys: the Survey on Access to Finance for Businesses (SAFE, conducted from February 19 to April 1), the Consumer Expectations Survey (CES, March 5 to March 30) and the First Quarter Bank Lending Survey (BLS, March 19 to April 7), made clear that the ECB will not only need to remain vigilant in maintaining anchored inflation expectations, but will also need to manage the growing risks of deterioration in economic growth.”
“Overall, there was nothing in the announcement that would challenge our expectations for a first rate hike in June and a likely second in September. However, we see increasing signs of downside risks to growth, which suggests that the path of core inflation may be different than in 2021-22 and that the market valuation of three increases this year may be too high.”
(This article was created with the assist of an artificial intelligence tool and has been reviewed by an editor.)
