ECB: Data risks complicate policy path – Societe Generale

Societe Generale economists highlight that Euro area growth nearly stalled in 1Q, with 0.1% qoq GDP and weak confidence indicators. They argue downside risks to growth are rising even as headline inflation is set to climb further. They maintain expectations for European Central Bank (ECB) rate hikes in June and September but sees market pricing of three hikes as excessive.

Growth risks rise as inflation builds

"At 0.1% qoq, euro area growth got close to stagnation in 1Q. It is of course way too early to see there an impact of the Iran war. The few hard data we have for France in particular do not show a clear immediate impact on consumption (real spending on goods ex energy was decently up on a yoy basis in March)."

"On the inflation side, headline inflation came in at 3% yoy in April, up from 2.6% before, driven by higher energy prices, whereas core inflation decelerated slightly to 2.2%. We expect headline inflation to peak at 3.7% in January 2027 while core inflation could peak at around 2.7% somewhat later, with limited second round effects on wages."

"Three ECB surveys, the Survey of the Access to Finance of Enterprises (SAFE, conducted 19 February to 1 April), the Consumer Expectations Survey (CES, 5-30 March) and the 1Q Bank Lending Survey (BLS, 19 March to 7 April), made it clear that not only will the ECB need to stay alert on maintaining anchored inflation expectations but it will also need to manage rising downside risks to growth."

"Overall, there was nothing in the communication that calls into question our expectation of a first rate hike in June and a likely second in September. However, we see growing signs of downside risks to growth, suggesting that the path of core inflation could be different than in 2021-22 and that the market pricing of three hikes this year may be too much."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)