Although inflation in the euro area is different from that in the United States, as ECB President Christine Lagarde has argued, the euro area still faces many of the same headwinds as other countries, and the extent to which price growth has slowed remains uncertain. It will be limited. The ECB cut interest rates. June was at the table on Friday and said that with inflation slowing towards 2%, the Group of 20 is “not the same” as the United States, which is suffering from unexpectedly stubborn inflation that could delay rate cuts. No,” he claimed. Lagarde points out that Europe does not exist in a vacuum, and economists point out that America's problems are sure to spill over across the Atlantic, albeit in a more benign form over time. There is. Two new studies by the ECB published on Thursday, by contrast, show that one suggests euro zone growth will be barely above zero this year, and the other suggests that the euro zone's largest companies This indicates that the company expects investment cuts, job cuts, and a decline in retail sales. Preliminary signs of recovery in demand and sentiment point to only a slow and modest recovery, although the bottom has hit. Meanwhile, the annualized growth rate in the United States exceeded 3% in the last quarter of 2023, with inflation mainly driven by demand. Prices in the euro zone rose by just 1.1%, with figures released by France and Germany on Friday showing manufactured goods prices pushed down the key figures. Economists say this is partly due to an increase in cheap imports from China. Although trade has rebounded from low levels, monthly import statistics show a sharp increase in trade with China in early 2024, and given weak domestic demand, these new imports are likely to be discounted. It is inflationary. By contrast, U.S. consumer demand remains very strong, so any new imports have excellent pricing power. Fiscal policy is another important factor in the divergence. The U.S. government expects its budget deficit to reach 5.6% of GDP this year, and the deficit may rise further in 2025, but fiscal demands in the euro area are shrinking, and this year's budget deficit will be 2.9%. It is expected to decline again in 2025. The labor market is also important. Unemployment in the euro area may be at historic lows, but the broader slack measure, which also takes into account underemployment, is around 11%, compared with just over 7% in the US. More importantly, much of the euro area's high employment is due to corporate hoarding of labor. For all those concerned about losing skilled workers, the United States continues to create new jobs at a much faster rate than expected. Also, high interest rates tend to affect housing costs in the US much faster than in Europe, which is the main reason why “shelter” inflation is above 5%. Still, Europe will suffer from rising commodity prices like other countries, or given that it is a net importer. Energy has been the biggest driver of inflation this year, but oil is up 14% so far in 2024 and will continue to do so. Although natural gas prices have remained largely stable, prices will begin to rise in the second half of this year. Moreover, expectations for faster rate cuts in the euro area are already causing a weakening of the euro, which is pushing up the prices of imported goods and therefore consumer prices. Lower labor productivity means higher unit labor costs, which will ultimately have to be reflected in consumer prices, potentially further accelerating inflation in Europe. Nevertheless, the divergence is clear and the ECB could even cut interest rates before the Fed. Your ability to go it alone will be limited because you will be exposed to the same headwinds. – Reuters
