Eurozone: Inflation shock and recovery balance – ABN AMRO

ABN AMRO notes that the new energy shock will push Eurozone inflation higher, though less severely than in 2022–23, as gas price rises are smaller and electricity has decoupled from gas. The ECB’s need to pre-empt second-round effects will tighten financial conditions and damp growth, but a cyclical recovery should broadly continue, supported by increased German fiscal spending.

Energy-driven inflation and fiscal support

"The inflation jump from the new energy shock will outweigh the hit to growth."

"However, we expect a much narrower and manageable rise in inflation compared to the 2022-23 shock."

"This is because the magnitude of gas price rises is much lower, but also because electricity markets have largely decoupled from gas."

"Still, because the ECB will need to get ahead of any second round inflation effects, growth will be dampened by a tightening of financial conditions."

"At the same time, the cyclical recovery is expected to broadly continue, helped by higher German fiscal spending."

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