ECB : Big package in March

France: When the construction sector goes well, so does the economy6/24/2022

Portugal: a resilient economy6/17/2022

Italy: banks’ net income sharply declined in the first quarter of 20226/10/2022

Let's talk about climate change, often6/3/2022

United Arab Emirates: Favourable economic prospects 5/27/2022

European household account: a turbulent story 6/28/2022

Once protected by the logic of “whatever the cost”, household purchasing power in Europe is now threatened by inflation. After the pandemic, public policies are being solicited once again to help reduce the loss of purchasing power, albeit without really succeeding. In 2022, the real disposable income of Eurozone households is expected to decline by about 2.5%. Consumption is still rising, but only because the household savings rate is declining, a trend that masks extremely diverse situations.

Unwarranted spread widening: measurement issues (part 2) 6/27/2022

A lasting, unwarranted widening of sovereign spreads in the euro area would represent an excessive tightening of financial conditions and weigh on activity and demand. It would run into conflict with the objectives of the ECB in the context of its monetary policy normalisation. Spreads are influenced by various fundamental variables that are directly or indirectly related to debt sustainability issues. These tend to be slow-moving. Sovereign spreads also depend on the level of risk aversion, a variable that fluctuates a lot and which is influenced by global factors. This complicates the assessment of whether an observed spread widening is warranted or not.

Unwarranted spread widening: measurement issues 6/19/2022

In recent weeks, the prospect of several ECB rate hikes has caused an increase in Bund yields and, unexpectedly, several sovereign spreads. Beyond a certain point, higher spreads may become unwarranted. Under such circumstances, the ECB might consider stepping in to avoid that its policy transmission would be impacted. Determining whether sovereign spreads have increased too much is a real challenge. Historically, based on a 20-week moving window, the relationship (beta) between the BTP-Bund spread and Bund yields fluctuates a lot, so this calls for taking a longer perspective. Using data since 2013, the current spread is in line with an estimate based on current Bund yields. Clearly,  other economic variables should be added to the analysis. It shows the complexity of the task should the ECB commit to address unwarranted spread widening.

ECB meeting of 9 June: preparing for lift-off – towards neutrality or beyond? 6/6/2022

At its 10 March meeting, the ECB paved the way for raising its key deposit rate, although the timing of the first rate increase remained uncertain at the time: the odds of a September move had declined compared to a few weeks ago and July was excluded, which left December. The wait-and-see approach still seemed appropriate given the increasing downside risks to growth, aggravated by the current inflationary shock, the war in Ukraine and China’s zero-Covid strategy. Yet economic data reported in the meantime, as well as the hawkish tone of several ECB members, seems to have accelerated the tempo. Concerning data, it is the combination of high inflation, a weak euro and relatively resilient growth that has moved forward the lift-off date.

Let's talk about climate change, often 6/3/2022

Climate change and the energy transition are high on the European agenda. Last year, 'Fit for 55' was presented, a plan to deliver the EU's 2030 climate target on the way to climate neutrality and to reduce greenhouse gas emissions by at least 55% by 2030. Following the war in Ukraine, REPowerEU was launched, with the ambition to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition. These initiatives imply that millions of households and businesses will need to make  investments in order to save energy and use alternative energy sources.

Energy price inflation in the Eurozone: government responses and impact on household purchasing power 5/19/2022

The sharp rise in energy prices since April 2021 has been the main driving force behind the current surge in Eurozone inflation. The outbreak of war in Ukraine on 24 February accentuated this trend, sending the energy component of the harmonised index of consumer prices (HICP) up 44.4% y/y in March 2022. Faced with this situation, the governments of the four main Eurozone economies under review in this article have acted to try to buffer the shock on economic players, and notably on household purchasing power, via direct subsidies, tax cuts, price regulations and measures to boost nominal incomes.  Although their actions have clearly helped ease the rise in energy costs, they have not prevented a loss of household purchasing power thus far in 2022, even though it is expected to be relatively mild. Moreover, they have not prevented inflation from spreading to other components of the consumer price index.

	The Eurozone: inflation, stagflation, recession? 5/18/2022
The inflationary surge since 2021 has turned into an inlflationary shock, fuelling fears of stagflation an recession. For Hélène Baudchon, however, there are reasons to temper concerns.

Inflation and the sustainability of public sector debt 5/15/2022

At first glance, higher inflation seems like good news for governments. After all, inflation erodes the real value of debt and lowers the public debt/GDP ratio through a higher nominal GDP. However, the impact of inflation on public finances depends on whether higher inflation was anticipated by financial markets and on its expected persistence. Both factors would influence the borrowing cost and hence the dynamics of the debt ratio through the difference between this cost and nominal GDP growth. Public finances should benefit from having a central bank that is credible in its ability to keep inflation expectations well anchored and is not afraid of tightening policy when inflation has moved well above target. In the euro area, higher Bund yields cause higher sovereign spreads, reflecting a higher risk premium, which in the longer run will worsen the dynamics of the debt ratio. It implies that fiscal policy also has a role to play by keeping the debt ratio under control.

	Wage-price loop: low risk but one to watch 5/13/2022
One of the economics themes currently being debated, the possible start of a wage-price loop is a cause for concern. However, at first and under normal conditions (which, it is true, is not the case right now), a wage-price loop is not a problem in itself.

Eurozone: how worried should we be about recession? 5/9/2022

In the space of just a few months, growth prospects in the eurozone have deteriorated markedly. So much so that the risk of a recession is looming this year. Between our growth forecast from early 2021 – when it peaked at 5.5% – and our current scenario, drawn up in mid-March 2022, expected growth has been about halved; we now expect a figure of 2.8%. As recently as November 2021, we were still forecasting 4.2%. This figure of 2.8% still looks very high, as it is well above the long-term trend rate of 1.6% per year on average between 1996 and 2019. However, it relies on an exceptionally high growth carry-over of 2.1% in Q1 2022 and, for the subsequent quarters, on projected weak but positive growth. However, since mid-March, downside risks have increased, particularly due to the amplification of the inflationary shock, and the probability of a recession has increased.