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The euro zone economy is expected to weaken again in the fourth quarter, but the recent rebound in inflation is expected to continue in the coming months, the European Central Bank's deputy president has warned.
Governor Luis Deguindos said in a speech in Madrid on Wednesday that the rapid pace of disinflation seen last year was expected to “slow in 2024, with a It is likely that there will be a temporary halt in 2020.” beginning of the year.” Consumer price inflation in the euro area accelerated to 2.9% in December from 2.4% in November.
He added that weak indicators point to an economic contraction in December. That would confirm “the possibility of a technical recession in the second half of 2023 and a weak near-term outlook,” he said.
His comments come at a time when the ECB will be in trouble at its Jan. 25 Governing Council meeting over how quickly to start cutting interest rates if the economic outlook remains weak and inflation remains above its 2% target. Emphasize what you are facing with the decision. Although many economists expect euro zone inflation to reach its target this year, the central bank does not forecast this until the third quarter of 2025.
The ECB's cautious view of the pace of rise in inflation was underlined by Governing Council member Isabel Schnabel, who said in a Q&A session on social media site X that “it is too early to discuss rate cuts.”
He said that “additional data supporting the disinflationary process is needed” to ensure that inflation returns sustainably to the ECB's target, adding that “geopolitical tensions are likely to drive down energy prices and transport costs.” “This is one of the upside risks to inflation because it could push it higher,” he added. That's why we need to remain vigilant. ”
DeGuindos did not say how a possible recession would affect monetary policy, saying that “future decisions will continue to follow a data-driven approach to determining the appropriate level and duration of restrictions.” He stuck to his oft-repeated line.
Carsten Brzeski, an economist at Dutch bank ING, said the central bank governor's comments about accelerating inflation made it less likely that the ECB would cut interest rates in the first quarter. “If you connect the dots, you have another rebuttal to expectations for a rate cut in March,” he said.
Deguindos expects inflation in the euro zone to follow a similar path to Spain, where it fell below 2% in June 2023 as the government phased out energy subsidies, but last year it fell below 2%. It exceeded 3% in four months.
“The positive effects of the energy infrastructure will take hold and energy-related compensation measures will expire, leading to a temporary acceleration in inflation,” he said.
The eurozone economy stagnated for most of last year, contracting by 0.1% in the three months to September.
It is widely expected that the economy will recover modestly this year due to falling inflation and rising wages. The ECB last month predicted eurozone growth would accelerate from 0.1% in the fourth quarter of 2023 to 0.4% in the third quarter of this year.
But DeGuindos questioned this, saying growth was “disappointing” and that “the slowdown in activity appears to be widespread, with construction and manufacturing sectors particularly affected.” “Services are also expected to soften in the coming months due to weaker other economic activity,” he added.
His pessimistic outlook is largely due to a closely watched survey of euro zone purchasing managers that pointed to a continued decline in business activity late last year. Although the S&P Global PMI was revised upward last week, it remained unchanged at 47.6, still well below the 50 mark that separates economic expansion from contraction.
De Guindos said the euro area labor market “remains particularly resilient to the current economic slowdown” after the euro area unemployment rate returned to a record low of 6.4% in November.
