It was slow to react to the beginning of the inflationary shock, but the decisiveness and harshness with which the European Central Bank (ECB) has applied its monetary policy since July of last year, when the first increase in interest rates in eleven years was approved , already has clear effects on the Eurozone economy. Indicators such as the survey of purchasing managers with which the PMI index is prepared show evident risks of contraction in the third quarter and the GDP data until March have been revised downwards – reducing the growth in activity by 0.3 to 0.1% due to the stagnation of private consumption.
Despite everything, in the second quarter the region’s economy ‘only’ stagnates and avoids a fall for the moment. It may seem that the reasons to press the brakes at its meeting next Thursday are more than evident, however, the resilience and strength that the labor market of the countries that share the euro has been registering extraordinarily complicates the situation for the ECB. The fact that the unemployment rate remained at historic lows last July, at 6.4%, is favoring notable increases in salaries, which threaten to make the high rates of underlying inflation chronic.
Although the general inflation rate moderated two tenths in July to 5.3%, its lowest level since before the war broke out in Ukraine, the underlying inflation rate (which excludes energy and food prices from its calculation) fresh, because they are more volatile) remained at 5.5% year-on-year, so it has barely moderated two tenths since the record it hit last March. CaixaBank Research points out that most of the components of the CPI have slowed down, and that the resistance in summer of general and core inflation (which excludes energy and food) reflects, above all, base effects related to services and greater volatility that energy prices have been experiencing.
Salary pressures worry the ECB
Without a doubt, the ECB “would have arguments to be tough”, and even to raise rates again, given that the progress to date in controlling underlying inflation has been very little and it remains well above the official objective, they point out from the market analysis consultancy MacroYield. This scenario is very worrying among the ‘hawkish’ or orthodox members of the entity’s governing council, especially when Eurostat, the community statistics office, has confirmed that unit labor costs rose by 5% year-on-year in the first quarter and that 3% of jobs are vacant.
In the German case, for example, wages increased by 6.6% between April and June in relation to the previous year (inflation was 6.5%), in what represents their largest increase for a single quarter since the series began. compiled by Destatis, the German statistics office, in 2008. At the national level, the cost per hour worked increased by 6.5% in Spain in relation to the same period of the previous year, accelerating compared to the start of the year, when the increase was 4.4%. However, from Goldman Sachs point out that more recent indicators suggest that wage pressures “have begun to ease”, in line with their forecast of a notable cooling of wage increases in the coming months as headline inflation declines.
The ECB will publish its new economic forecasts
Another of the keys to the meeting that the entity holds on Thursday has to do with the publication of its new economic perspectives. In principle, it is expected that the issuer will revise its growth projections slightly downwards, but will raise its inflation projections. It is for this reason that Martin Moryson, Chief Economist for Europe at the DWS management company, considers that this would be “a good opportunity to take the definitive step” and make it clear, both to the markets and to consumers, that the ECB really takes into account It would be the fight against inflation. “Then we sit back and wait and see how inflation rates (slowly) normalize,” says the expert.
The ECB last raised rates last July, when it placed the main reference rate at 4.25%, its highest level since 2008, at the dawn of the international financial crisis. If the data is not strong enough to justify an additional increase this week, “it is unlikely to justify an increase later, when activity will remain weak and inflation will have weakened further,” adds from Bank of America Rubé n Segura-Cayuela, its Chief Economist for Europe. The US entity rules out that the first rate cut will arrive before June 2024, and they only contemplate one reduction per quarter over the next year and the following year.
Precisely, facing the first half of next year, Goldman Sachs analysts are confident that growth will strengthen again, among other things because it is likely that the manufacturing sector will stabilize in the coming months as the global invention cycle reverses. . years and reduce the burden of the energy crisis. At the same time, they consider that real household income will be significantly boosted by the fall in inflation – which has already caused some recovery in consumer confidence -; and they point out that the latter for growth derived from monetary tightening will decrease rapidly between January and June of next year, “far surpassing” the fiscal obstacle.