Downside risks for the economy increase

Already last week, the PMI survey data in manufacturing and in services showed unexpectedly heavy gloominess. Moreover, this week, consumer confidence in the Eurozone fell to a low level similar to that seen at the beginning of the pandemic outbreak in early 2020. Given the massive real wage losses triggered by a record inflation rate of more than 8% recently, the slump in consumer confidence is understandable.

Against this backdrop, the downside risks to the Eurozone's economic outlook have increased sharply in recent weeks. With leading indicators weakening at the global level as well, the downward pressure on Eurozone growth is further intensified. The momentum of Germany's exports to China has already been showing signs of weakening since fall 2021. With the latest data available, other countries such as Brazil, India and Mexico are now showing the beginnings of a cooling in external demand.

The curtailment of Russian gas supplies is another risk factor for the economy, as this supply shortage has further increased energy prices in the Eurozone. As a result, the upward pressure of energy prices on inflation could last longer than previously expected. In addition, high energy prices, which have now increased six-fold since the beginning of 2021, are posing significant problems for industry. If this trend continues, we expect energy-intensive industrial sites in Europe to be temporarily shut down and replaced by imports from overseas. This would put additional pressure on growth in the Eurozone via a deterioration in the balance of trade.

On the global level, at least, there are signs of a gradual cooling in key raw material prices, pointing to falling demand. If this trend continues, it should have a dampening effect on the level of inflation in the fall with a certain time lag. The development of global commodity prices in the coming weeks is therefore an important leading indicator for inflation prospects in the Eurozone.

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