Eurozone: Growth outlook has deteriorated

This is part of the Global Monthly, see here

GDP growth in 2022 will probably turn out somewhat higher than we expected before. This change is mainly due to the upward revision for Q1 (to 0.6% from 0.3%). We have kept quarterly growth during 2022Q2-Q4 largely unchanged and still expect average growth of around 0.3-0.4% qoq during these three quarters, when the easing of supply chain bottlenecks and the bounce in services consumption is expected to raise output and spending. However, moving into 2023 growth should slow noticeably, probably to levels well below trend. By then, consumers should have spent most of the savings that they accumulated during the pandemic. Consumption growth is expected to be supported by robust employment growth in 2022, but the outlook for the labour market should deteriorate towards the end of the year. Moreover, temporary catch-up effects in industrial production and fixed investment will fade. On top of that, eurozone domestic spending as well as global trade is likely to slow on the back of the more aggressive interest rate hikes by the Fed and ECB, which is tightening financial conditions. We have roughly halved our quarterly growth numbers for 2023 to around 0.1-0.2% qoq, which lowers annual growth to around 1.3%, down from our earlier estimate of 1.7%. Our forecast is well below the consensus forecast.

Inflation came in higher than expected in May, at 8.1%, up from 7.4% in April. Although the rise in inflation continued to be driven by energy and food prices, core inflation increased as well. Services price inflation is currently being lifted by a normalisation of holiday and leisure prices as well as the pass-through from high food and energy prices into, for instance, transportation services and restaurant and catering services. Meanwhile, supply chain disruptions and high energy prices are also contributing to higher non-energy industrial goods price inflation. Recent trends in commodity markets suggests that food and energy inflation will move even higher in the months ahead, but should start to decline in the Autumn. This will also reduce the energy-related rises in goods and services inflation. Wage growth is expected to increase this year and next, but the upward impact on underlying inflation will be moderate as labour productivity is expected to increase as well. Moreover, the deteriorating economic growth outlook should limited wage growth in 2023, as labour market conditions become less rosy. We expect the unemployment rate to rise somewhat next year.

Following its June meeting the ECB announced the end of QE and signalled a first 25bp rate hike in July. It seems that a 50bp hike is on the cards for September. Subsequently, we expect a 25bp hike during every Governing Council meeting until February 2023, when the deposit rate should reach 1.00% (up from -0.50% now). We have not pencilled in any rate hikes after that, which reflects our expectation for economic growth to slow down considerably in 2023.