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The eurozone economic system appears set for an additional downturn within the fourth quarter, whereas a current pick-up in inflation is anticipated to persist within the coming months, the vice-president of the European Central Financial institution has warned.
In feedback geared toward damping market expectations of an interest-rate minimize in March, Luis de Guindos stated in a speech in Madrid on Wednesday that the fast tempo of disinflation seen final yr was prone to “decelerate in 2024 and to pause briefly initially of the yr”. Client worth development within the eurozone picked up from 2.4 per cent in November to 2.9 per cent in December.
He added that delicate indicators pointed to an financial contraction in December. That will affirm “the potential for a technical recession within the second half of 2023 and weak prospects for the close to time period”, he stated.
His feedback underline how the ECB faces a clumsy choice when it meets on January 25 over how early to begin chopping charges when the financial outlook is weak and inflation stays above its goal of two per cent. Whereas many economists predict eurozone inflation will hit that focus on this yr, the central financial institution will not be forecasting this till the third quarter of 2025.
The ECB’s cautious view on the tempo of disinflation was underlined by its govt board member Isabel Schnabel, who wrote in a Q&A session on social media website X: “It’s too early to debate fee cuts.”
To ensure that inflation would return sustainably to the ECB’s goal “requires further knowledge confirming the disinflationary course of,” she stated, including: “Geopolitical tensions are one of many upside dangers to inflation as they may drive up power costs or freight prices. That’s why we have to stay vigilant.”
De Guindos didn’t say what a probable recession would imply for financial coverage — sticking to the ECB’s oft-repeated line that “future selections will proceed to observe a data-dependent strategy to figuring out the suitable degree and length of restriction”.
Carsten Brzeski, an economist at Dutch financial institution ING, stated the central banker’s feedback about inflation selecting up lowered the chance of a fee minimize by the ECB within the first quarter. “Should you join the dots, it’s one other argument towards March fee minimize expectations,” he stated.
De Guindos stated he anticipated inflation within the eurozone to observe an analogous path to Spain, the place it dropped beneath 2 per cent in June 2023 earlier than rising above 3 per cent within the ultimate 4 months of final yr as the federal government phased out power subsidies.
“Constructive power base results will kick in and energy-related compensatory measures are set to run out, resulting in a transitory pick-up in inflation,” he stated.
The eurozone economic system stagnated for a lot of final yr and shrank 0.1 per cent within the three months to September from the earlier quarter.
It’s broadly anticipated to stage a light restoration this yr due to decrease inflation and better wages. The ECB had forecast final month that eurozone development would speed up from 0.1 per cent within the fourth quarter of 2023 to 0.4 per cent within the third quarter of this yr.
However De Guindos solid doubt on this by saying development was “disappointing” and “the slowdown in exercise seems to be broad-based, with building and manufacturing being significantly affected”. He added: “Providers are additionally set to melt within the coming months because of weaker exercise in the remainder of the economic system.”
His gloomy outlook stems largely from a intently watched survey of eurozone buying managers that pointed to a continued decline of enterprise exercise on the finish of final yr. The S&P World PMI index was revised up final week however that left it unchanged at 47.6, remaining effectively beneath the 50-mark that separates contraction from growth.
De Guindos stated the eurozone labour market “continues to be significantly resilient to the present slowdown” after unemployment within the bloc returned to a document low of 6.4 per cent in November.