After months of consecutive interest rate hikes, European central banks might finally end the cycle, addressing GDP contractions.
The inflation dilemma persists in Europe as central banks await new data and assess a possible end to the current hike cycle. Next Friday, Eurozone inflation will reveal whether hikes must continue or not in the world’s largest common market.
Inflation has been dropping steadily in the Eurozone, although at a slower pace throughout the summer. This was widely expected as the hot season usually increases consumer spending (as well as most countries’ GDPs).
Markets expect a drop to 5.3% in headline inflation and 5.5% in core consumer prices. Although significantly lower than the double-digit inflation last year, it remains far higher than the 2% ECB target.
The European Central Bank (ECB) enacted another rate hike last week. Interest rates were raised by 25 basis points to 4.5%.
European markets dropped after Monday’s opening, with the combined STOXX 600 falling 0.77% in the morning. Traders are particularly worried about Europe’s growth, as “higher for longer” interest rates will exacerbate the Eurozone recession.
Analysts widely expect the Eurozone’s economy to contract in 2023, with a slight growth in 2024. The Eurozone fell into a recession already in June, with little to no signs of recovery in the following quarter.
But ECB governor Christine Lagarde always declared inflation as her top priority. If consumer prices’ readings are good, however, European rate hikes might have finally come to an end.
Germany and the UK
Another crucial indicator for the ECB to come out next week will be the German Income For Operation (IFO) data. This will show the overall health of Germany, widely considered to be “the sick man of Europe”.
German industries and exports have been declining for a swath of reasons, dragging the entire European Union into dire straits. According to the Bundesbank, Germany will experience another GDP contraction this quarter.
Finally, the United Kingdom decided last week to pause rate hikes, following the strategy used by the Federal Reserve. Inflation in the UK is higher than in the European Union, although it declined more than expected in August to 6.7%.
On the other hand, the British GDP shrank in July by 0.5%, forcing the International Monetary Fund to revise prospects for the UK economy lower.
The United Kingdom, however, should avoid a recession in 2023, perhaps dodging it altogether if the Bank of England ends the hike cycle.
Overall, the economic situation in Europe looks dire, and it might be worsened further by another winter of the Ukraine war. European leaders, however, should be more prepared to address the situation than last year.
