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Inflation situation in Europe
Macro

Inflation situation in Europe

Industry professionals from Generali Investments, AXA IM & La Française AM share their insights about the situation on European markets and the outlook for the inflation path.
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15 MAY, 2024

By Jose Luis Palmer from RankiaPro Europe

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Following yesterday's inflation figures for Germany and Spain, a number of industry experts analyse the current situation of the European economies and how the macroeconomic context is affecting economies and investments in the Old Continent.

Inflation to peak at 2.4% for the Eurozone in 2024

Martin Wolburg, senior economist at Generali AM, part of the Generali Investments ecosystem.

The euro area activity is back into expansionary territory. The first (preliminary flash) estimate reported a Q1/24 growth of 0.3% qoq, better than we and markets had expected. Key sentiment indicators for April suggest that at the outset of the second quarter the economy gained further traction. The composite PMI advanced to 51.4, the highest since May last year. The signalled increase in activity rests on the domestic economy: While domestically-driven services sentiment rose, the one in manufacturing took a backlash. A somewhat surprising turn in the inventory component (mainly due to weaker orders) point to a bumpier recovery in manufacturing. All in all, we continue to see growth strengthening over the coming months and stick to our 2024 growth forecast of 0.6% yoy. Risks are now slightly tilted to the upside in our view.

Headline inflation was at 2.4% yoy in April, unchanged from March. Over the coming months we see inflation trending further down but not smoothly. Base effects in several countries from the unwinding of governmental price-cap measures and possible spikes in the oil price due to geopolitical tensions will mask fading underlying inflation pressure, e.g. due to easing wage growth and producer price disinflation. We stick to our 2024 inflation forecast of 2.4%.

Markets too prudent on the ECB

The ECB gave a broad hint about a first rate cut by June, backed also by the hawks within the Governing Council. Yet markets are neither fully convinced about a 25 bps cut by June nor about at least three 25 bps cuts in 2024. We think markets became now too cautious after they were much too enthusiastic on rate cuts at the outset of the year. A key driver was the reassessment of the Fed rate outlook. While there are clearly factors (e.g. fx) implying a more restrictive ECB stance, other (e.g. financing conditions) recommend for easing. All in all, we do not expect a major impact on euro area inflation. Unless price risks from wages or huge rises in energy prices materialize, we see the ECB easing cycle unscathed. We continue to look for 100 bps cuts in 2024 but acknowledge a risk of only 75 bps.

Inflation under control and economic growth above expectations

Françoise Rimeu, senior strategist at La Française AM.

There is no bad news on price increases in Europe, with inflation in line with expectations. Here too, the market anticipates few longer-term risks, with inflation forecasts predicting a quick return to 2%. Any figure in line with expectations is good news for the ECB. On the growth side, the good news continues with PMIs rising, ZEW and IFO accelerating, and growth surprisingly upwards in the first quarter. The non-downgrade of France's rating by Fitch and Moody's is also reassuring.

As for equity markets, the rise in bond yields and the resulting increase in volatility have been difficult to digest. However, the fairly strong earnings season and the hitherto subdued geopolitical risk have helped to limit losses at the end of the month. Nevertheless, corporate forecasts have been somewhat disappointing.

Looking at Europe through US lenses could lead to policy mistakes

Gilles Moëc, Chief Economist at AXA IM.

The Riksbank was the second central bank, after the Swiss National Bank, to cut rates in Western Europe. The minutes of the ECB's April meeting were even more explicit than Lagarde at her press conference in telegraphing a June rate cut as ‘plausible’. The scenario of a general ‘European wave’ of monetary easing before the summer, in contrast to a more hesitant Fed, is now gaining momentum.

The risk of missing the inflation target and inadvertently causing excessive cost to output and employment looms over European policymakers. While the Riksbank is now being praised for daring to cut ahead of the ECB despite the weak krona, the Swedish central bank may have waited too long before beginning to reverse its stance. Against a backdrop of recession and a significant rise in unemployment, the Riksbank now expects inflation to fall below 2%.

A widely held view among the hawks on the ECB's Governing Council is to believe only in ‘real data’, focusing excessively on getting actual inflation figures in line. Waiting for inflation to actually be on target - which, by the way, is not exactly the case even in Sweden - imposes a totally unnecessary cost in terms of lost output and employment. Note that given that monetary policy transmission is slower in the euro area, anticipating the lagged effect of its stance is even more essential for the ECB than for the Riksbank.

The ECB minutes showed great concern about what the Federal Reserve might do in the face of US inflation resistance. Given the dominance of the US market, it is natural for European policymakers to keep a close eye on macroeconomic and political developments in the US. But we have been arguing since the beginning of the year that the risks are asymmetric across the Atlantic, with a potential risk of inflation underpricing in Europe versus a considerable risk of underpricing in the US. Reading Europe through US lenses could lead to costly policy mistakes.

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