ECB : Big package in March

United States: Expanding US federal debt will require raising more foreign capital12/2/2022

Can Germany escape the recession?11/25/2022

Gone with the wind: the erosion of real household wealth11/18/2022

Spain: national recovery plan, contrasted progresses11/10/2022

France: Inflation spike? Not yet11/3/2022

Eurozone: the surprising resilience of the labour market, will it last? 11/21/2022

Since the start of this year, the European Commission’s industry sentiment survey has seen a significant decline, yet companies continue to report that labour remains a key factor limiting production. This is probably due to order books that remain at record high levels in terms of duration of assured production. Through their impact on the growth of employment and wages, labour market bottlenecks should provide some resilience to consumer spending when the economy is turning down. This support will probably not last however. Hiring intentions of companies have started to decline, which should ease the bottlenecks through a slowdown of employment growth.

Another negative surprise on inflation and a pleasant one on growth  11/13/2022

Harmonised inflation in the Eurozone surprised again unfavourably in October, reaching 10.7% year-on-year according to Eurostat’s preliminary estimate, compared to the Bloomberg consensus forecast of 10.2%. It was the second month in a row of such a large acceleration in prices (+0.8 points). This was not the only bad news: half of this acceleration can be attributed to core inflation, 0.3 points to food inflation and 0.1 points to the energy component. Inflation therefore continues to spread and to strengthen. While the persistent and common component of inflation (PCCI) seems to have peaked in May this year (at 6.4%), its decline since then (5.5% in September, latest available figure) is not yet visible in the other measures of inflation.

Credit pulse in the eurozone: new peak in September 2022, demand slowdown and tightening of lending conditions expected in Q4 11/6/2022

After posting negative figures for most of 2021, the credit impulse returned to positive territory in early 2022 and rose to unprecedented levels (+3.8 points in August 2022 and +3.7 points in September 2022). This growth contrasts starkly with the sharp slowdown in the eurozone’s GDP in Q3 2022 (+0.2% quarter-on-quarter, compared to +0.8% during Q2 2022), which it undoubtedly helped to limit. After accelerating hugely since spring, in September 2022, outstanding loans to the private sector showed their strongest increase since December 2008 (+6.9% year-on-year), with outstanding loans to non-financial corporations (NFCs) showing their largest increase since January 2009 (+8.9%). Even though outstanding loans to NFCs have increased across the board, outstanding loans with maturities of less than one year (+19.8% year-on-year) are growing far more healthily than loans with maturities of more than five years (+4.1%), in accordance with the purpose of the loan (such as cash needs or inventories).

The disinflation of 2023, between hope and uncertainty 10/30/2022

The latest ECB survey of professional forecasters (SPF) shows a downward revision of the growth outlook and an upward adjustment of the inflation forecast. For next year, the real question is not about the direction of inflation but about the speed and extent of its decline. Slower than expected progress could convince the ECB of the need for more rate hikes than currently priced by markets, implying a bigger output cost of bringing down inflation. Disinflation could indeed take longer than expected. Over the past two years, a variety of factors have led to an exceptionally elevated but also broad-based inflation. Not all shocks have occurred simultaneously and it often takes time for them to work their way through the system, from the producer to the wholesaler to the retailer. This creates an inertia in the inflation dynamics.

Eurozone: the contribution of supply-side issues to food price inflation 10/11/2022

Eurozone inflation reached the 10% y/y mark in September, according to Eurostat’s preliminary estimate, the highest-ever reading since the zone’s inflation rate has been measured. Energy prices were a major factor (up 40.8% y/y). In parallel, food prices rose at an increasingly rapid pace, with the harmonised index (also including alcohol and tobacco) up 11.8% y/y in September. Some of this increase in food prices stemmed from the impact of the surge in energy prices on the sector’s production costs. Even so, supply-side constraints linked to production difficulties also appear to have had a hand in this. Finished goods inventories in the agrifood sector were well below their normal levels, unlike other manufacturing sectors (which had built their inventories back up again during the slowdown in demand over recent months). This low level of inventories in the agrifood sector reflects supply-related constraints. These were exacerbated by production difficulties arising from the drought that hit most Eurozone countries during summer 2022. In France, strikingly, the increase in the price index’s food component accelerated significantly in September (up 9.9% y/y, according to Insee’s index, versus 7.9% one month earlier), while food price inflation had previously remained well below the level in the remainder of the Eurozone as a result of the caps on regulated gas and electricity prices. Food price inflation is expected to remain a factor for the next few months, both in the Eurozone and in France, owing to the persistent effect of higher energy prices and also because demand for food products is not very cyclical, which means demand is unlikely to be affected much by the risk of recession in the Eurozone. So the shortfalls are set to continue until the situation improves, which, in turn, will have an impact on inflation.

Rising interest rates and public debt sustainability 10/10/2022

Due to the recent significant increase in interest rates, Eurozone countries now have a borrowing cost on newly issued debt that, for an equivalent maturity, is higher than that of the existing debt. From a debt sustainability perspective, this necessitates a smaller primary deficit or a larger surplus, depending on whether the average interest cost is, respectively, lower or higher than the long-term nominal GDP growth rate. However, this effect will only be fully operational when the entire debt has been refinanced at the higher interest rate. Given the long average maturity of existing debt, the annual adjustment effort is small for the time being but it will grow over time. However, debt sustainability is about more than keeping the debt ratio stable under certain circumstances. It is also about the resilience to interest rate and growth shocks. The higher the debt ratio, the more important it is to do more than simply trying to stabilize it.

Gloomy September, double-digit inflation, marked deterioration in confidence surveys 10/2/2022

Dark clouds are continuing to gather over the Eurozone economy. The first set of data available for September is not positive and this can be seen in our Pulse. Looking at the survey data, the blue area (recent conditions) is shrinking when compared to the dotted line (conditions four months earlier) and even, on some indicators, when compared to the grey dodecagon (the long-term average). The opposite is true for the inflation data. In fact, inflation reached a new level, at 10% y/y in September according to Eurostat’s preliminary estimate. Not only did inflation reach double figures – which was predictable, but still bad news – but its  0.9–points rise compared to July was broad-based across all its main components.

	Euro area : Outstanding bank loans’ developments not yet dampened by the increase in rates 9/30/2022
The rise in market interest rates since the beginning of 2022 has led to higher bank lending rates in the euro area. Both rates of loans for housing purchase and those of loans to non-financial corporations have been affected. For the time being, developments in bank loans outstanding do not reflect the tightening in bank lending conditions but the early consequences could materialize in 2023.

Heading for a recession ? 9/29/2022

The current unprecedented combination of shocks (inflation, health crisis, geopolitical issues, energy crisis, climate, monetary issues) is likely to overburden the Eurozone resilience and push the region into recession over the coming quarters. The deterioration in confidence surveys this summer provides an early indication of this likely outcome. However, we expect the recession to be limited in scope, in large part due to budgetary support. This recession should be followed by a moderate recovery as the various shocks start to ease. Faced with the continued surge in inflation, the ECB has moved up a gear. It will probably raise its rates by a further 125 bps by the end of the year (bringing the deposit rate to 2%) and then wait and see thereafter, allowing time to assess the extent of the decline in growth and in inflation.

The ECB moves up a gear   9/5/2022

An exceptional response to exceptional circumstances. There is a high probability that the ECB will raise its policy rates by 75 basis points at its meeting on 8 September. The fact is that the ECB has little choice but to respond with extraordinary measures to the continuing surge in inflation, despite the increased risk of recession. This is putting into practice the hawkish statements of Jackson Hole and the unconditional determination displayed to maintain price stability.