Imminent recession fears abated somewhat during November, as sentiment rebounded from subdued levels. Record low unemployment, EUR 600bn of fiscal support and a drop in energy prices from their autumn peaks all helped to lighten the mood of consumers and firms. So has Europe’s crisis ended before it even started? We do not think so. The current economic ‘strength’ is largely a holdover from the past. Manufacturing output continues to receive tailwind from high order backlogs and easing supply constraints. Households still benefit from EUR 800bn of ‘excess’ savings accumulated during the pandemic and government intervention that mitigates the energy shock.

However, cracks have started to appear. Retail sales declined 1.8% m/m in real terms during October, the biggest fall since December 2021. Households face headwinds not only from higher energy bills, but also rising interest rates. The energy crisis is far from over and government subsidies vary significantly across EU countries, as agreement on an EU-wide gas price cap remains elusive. An Ifo survey showed that 75% of German manufacturers have cut back on gas usage without curtailing production, however, 40% also said that more energy savings will necessitate production cuts. Overall, we think a double dip recession is a real risk in the euro area (see Big Picture Euro area - Double dip recession, 28 November) and challenging times lie ahead especially for Germany’s economy (see Big Picture Germany - 'Zeitenwende', 28 November).

On the face of it, the November flash HICP figures brought a welcome decline in headline inflation from 10.6% to 10.0%. However, with core inflation holding steady at 5.0%, the evidence for a similar peak in underlying inflation pressures was less clearcut. Firms continue to pass-on higher input costs to consumers and in spite of an approaching recession, we expect this process of cost-push inflation to extend into 2023. We forecast euro area HICP inflation to average 7.2% in 2023 and 2.9% in 2024, while core inflation will return to the ECB's target only in H2 24 (read more in Euro inflation notes - A 'sticky' problem, 30 November). For ECB, the stabilization in core inflation paired with the weakening growth outlook might be just enough evidence to slow the hiking pace to 50bp in December. However, we expect it to continue guiding for further rate hikes ahead, paired with a reduction of the balance sheet (QT), as 'stickily' high core inflation could remain a concern for ECB for some time yet.

The European Commission presented a first blueprint how to reform EU fiscal rules, which foresees individual member states getting a bigger say in their debt reduction plans, with extra time granted for justified investments and structural reforms, while also strengthening enforcement. We think the proposal is a step to a right direction, but we do not expect the new rules to reduce risks relating to public finances any time soon and some countries like Germany are sceptical about the reform (read more in EU fiscal rules - An evolution rather than a revolution, 21 November). US-EU trade relation have also seen a deterioration in recent weeks, after the adoption of the US Inflation Reduction Act. Gaining a leading position in the green transition race remains key for escaping the current 'stagflationary' dynamics that have captured Europe. Hence, the stakes for the EU to assert its position are higher than in previous transatlantic trade spats (read more in Euro macro notes - Transatlantic ties are in for a chill, 16 November).

Download The Full Euro Area Macro Monitor

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

AUD/USD remains unnerved above 0.6900 amid US-Sino woes, Aussie data

AUD/USD remains unnerved above 0.6900 amid US-Sino woes, Aussie data

AUD/USD is holding steady above 0.6900, consolidating the bounce amid the upbeat Australian Retail Sales data. The Aussie remains unnerved by the looming US-China tensions, with Chinese stocks down over 1% so far. Pre-RBA anxiety also keep AUD bulls on the edge. 

AUD/USD News

USD/JPY consolidates the rally below 132.50 on BoJ nominaton reports

USD/JPY consolidates the rally below 132.50 on BoJ nominaton reports

USD/JPY is consolidating the opening gap rally that hit a high near 132.50 in Asia this Monday. The Japanese yen remains heavy amid a Bloomberg report that Masayoshi Amamiya as the next BoJ Governor would be bullish for bonds and weigh on the yen and local financial stocks.

USD/JPY News

Gold exposes to $1,850 as yields strengthen amid hawkish Fed bets

Gold exposes to $1,850 as yields strengthen amid hawkish Fed bets

Gold price (XAU/USD) has resumed its downside journey after a short-lived pullback to near $1,870.00 in the Asian session. The precious metal is exposed to the critical support of $1,850.00 amid a sheer decline in US government bonds. The 10-year US Treasury yields have escalated their recovery to near 3.57%.

Gold News

Why Bitcoin is still in a bear market and what this means for BTC price

Why Bitcoin is still in a bear market and what this means for BTC price

Bitcoin is currently in a bear market, according to analysts, despite the massive rally of January. The selling pressure on the asset has reduced, with miner inflow to exchanges declining to multi-year lows. Despite the bullish catalysts, analysts are waiting a year post the 2022 bear market rally to conclude that the bearish phase is now behind us. 

Read more

Week Ahead – RBA next to hike

Week Ahead – RBA next to hike

After the past week’s central bank bonanza, things will quieten down in the coming days, although not completely, as the Reserve Bank of Australia will keep the rate hike theme running.

Read more

Majors

Cryptocurrencies

Signatures