EZ – Inflation stable at a high level?

Next week (April 29), a first flash estimate of Eurozone inflation for April will be published. In March, inflation rose to an all-time high of 7.5% y/y, up from 5.9% y/y in February. A further significant increase in energy prices (+44.7%) and food prices (5.0% y/y) was largely responsible for this.

Based on our assessment, inflation will probably stabilize at a high level in April. On the one hand, we expect food inflation to rise further. The rise in prices on the world markets for agricultural commodities is only passed on from producers to consumers with a time lag. We therefore expect the rise in consumer food prices to continue for some months. By contrast, based on the price trend for gasoline and diesel in April, energy inflation could ease somewhat in April. However, the development of gas and electricity prices is a factor of uncertainty in this context, as the substantial increase in wholesale gas and electricity prices is also passed on to consumers with a time lag. We expect core inflation (+3.0% in March) to remain at a high level.

We expect food prices in particular to be a key driver of inflation in the months ahead. The development of core inflation will also come into focus. An upward trend in prices can already be observed for individual components (tourism, vehicles and housing). It will now be necessary to observe the extent to which continued problems in supply chains caused by the war in Ukraine and Covid-19 lockdowns in China, as well as rising wage demands, will impact the dynamics of core inflation. We currently forecast inflation of 6.1% for 2022 as a whole. In the current environment, however, the risks to this forecast are still tilted to the upside. In the short term, the development of energy prices represents the biggest uncertainty factor for our inflation forecast.

EZ – Growth acceleration in 1Q 2022

Next week (April 29), a first flash estimate of Eurozone GDP growth for 1Q22 will also be published. In 4Q21, growth slowed significantly to 0.3% q/q. In 3Q21, growth was still 2.3% q/q. The main reason for this was Covid-19 related retrenchment measures, as well as supply chain issues leading to industrial production bottlenecks.

For 1Q22, we expect a slight acceleration of growth. On one hand, restriction measures to contain Covid-19 were already largely lifted in many Eurozone countries in February. On the other hand, there were initial signs of an easing of the situation in supply chains until the outbreak of the war in Ukraine. On average, industrial production therefore rose by 1.5% from January to February compared with 4Q21. However, the situation is already expected to have deteriorated again in March. In addition, increased inventory building in the face of the uncertain geopolitical situation may have had a positive impact on 1Q growth.

In the current environment, the economic outlook is subject to a high degree of uncertainty. We expect high energy prices to have a dampening effect on consumption and industrial production in the coming months. In addition, high energy prices will weigh on the Eurozone's foreign trade balance. However, there is still considerable pent-up demand, particularly in the services sector. Despite the difficult situation, we therefore expect the recovery in services to continue, especially in tourism, which is particularly important in summer for countries such as Spain and Italy. In addition, southern Europe will benefit significantly from EU recovery plan funding in 2022 (to the tune of close to 2% of GDP). We therefore continue to expect GDP growth of 3.5% for 2022.

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