A combination of the war in Ukraine, higher interest rates, and raging inflation has put brakes on business activity across the Euro area, sparking discussions of a recession coming soon. The pain in the markets is exacerbated by the fact that European countries need to wean themselves off Russian oil and gas, which is causing price spikes in the energy markets.
Germany, as the area’s largest economy, is feeling the heat as the energy crisis is battering its manufacturing base, along with softness in global supply chains. Since the entire German economic model seems to be in renovation mode with renewables, a recession almost seems guaranteed, which could plunge the entire Eurozone into one.
On the other hand, the CEO of Steno Research, Andreas Steno Larsen, and Chief Strategist at Danske Bank, Piet Christiansen, shared an infographic on Twitter, on October 19, from Bloomberg and Danske Bank research showing a steep drop in euro area inflation next year.
Christiansen said: “Markets are pricing a steep drop in euro area inflation fixings next year. Oct23 fixing priced below 2% (at 1.86%) and a trough in Jan24 at 1.52%. Longer-term inflation is priced in line with ECB target of 2%.”
It seems as if the long-term inflation will be in line with the European Central Bank (ECB) target of 2% in 2023.
Basis points increase
To bring inflation in line with the ECB’s target of 2%, more rate hikes will need to occur in the following months, and it seems as if they will have to be major ones, a minimum of 75 basis points. The next ECB meeting is on October 27, and it would be a surprise if another large rate hike doesn’t occur.
Meanwhile, Germany is now being seen as the sick man of Europe and the one dragging down the Euro area into the 2023 contraction, thanks to its high reliance on Russian gas.
For Europe to dig itself out of the inflation hole, reforms in the energy supply sector might be needed, along with strengthening the business capacity in the labor markets and increasing productivity all around.
If solidarity again shows up in Europe, as it did during the Covid-19 pandemic, then the reforms should happen soon, and Europe may be out of the inflationary woods in 2023, as the experts predict.
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