The inflation it does not give up, and the economic growth continues to slow down. This is the picture outlined by thelatest bulletin of the ECB, which analyzed the effects of the first rate cut after a long series of increases aimed at taming inflation. Estimates predict that inflation will remain above 2% until 2025, with a peak at the end of the year due to the end of the benefits from the decline in energy prices. Core inflation will also not give up. On the growth front, the situation remains weak. After a modest +0,2% in the second quarter of 2024, a slow and gradual recovery is expected in the coming years. Good news from market of work, which is holding up, even if consumption and investments remain weak.
On the front of risks, the ECB sees uncertain growth, complicated by geopolitical tensions and a less than brilliant global economy; while inflation risks are oriented to the upside: higher wages and geopolitical tensions could keep prices under pressure. But not everything is bleak: if inflation falls faster and confidence improves, positive surprises could arrive. Monetary policy remains flexible, ready to react to data, with markets that have welcomed with a decline in yields the first rate cut, although some concerns remain in the air.
The fight against inflation is not over
As regards the progress of theinflation in the euro area, forecasts indicate a increase inflationary pressures, with estimates of 2,5% in 2024, 2,2% in 2025 and 1,9% in 2026. The ECB expects inflation to rise in the second half of the year, mainly due to the fact that the sharp falls in energy prices will no longer influence annual rates, before falling again until reaching the 2% target “by the end of 2025”.
As for the'core inflation, the institution noted a slight increase in its forecasts for 2024 and 2025: it will go from the 2,9% forecast for this year to 2,3% in 2025 and 2% in 2026.
Economic growth subdued, job market stable
The situation of the growth remains weak. The Eurozone showed modest growth of 0,2% in the second quarter. Government spending and net exports supported this growth, despite a weakening of private domestic demand, with private consumption and investment retreating. For 2024, economic growth is forecast at 0,8%, increasing to 1,3% in 2025 and 1,5% in 2026.
Il job market, however, maintains a certain vitality. The unemployment rate remained steady at 6,4% but employment growth slowed. However, it is not all grey: wage dynamics continue to support real disposable income, even if overall labor cost growth will decline in the coming years. Households are expected to continue saving, but there is reason to hope that, sooner or later, they will return to spending.
Downside risks for growth, upside risks for inflation
The ECB stressed that the risks to economic growth of the Eurozone are oriented towards the Bass. Reduced export demand, caused by the weakening of the global economy and the intensification of trade tensions between the world's major economies, could slow economic expansion. In addition, the war in Ukraine and the conflict in the Middle East represent sources of geopolitical risk, with potential negative effects on household and business confidence and possible disruptions to international trade.
In this context, the European Central Bank has warned that economic growth could be weaker than expected, especially if the effects of monetary tightening are felt more than expected. On the contrary, a more favorable scenario could occur if inflation falls more rapidly and if greater confidence, together with a rise in real incomes, stimulates spending more than expected, or if global economic growth is stronger than expected.
On the front ofinflation, the ECB highlighted the risk that it could be higher than expected, if wages and profits rise more than expected. Current geopolitical tensions could push up energy and transportation prices in the short term, potentially impacting global trade. In addition, extreme weather events could push up food prices.
On the other hand, inflation could fall more than expected if monetary policy measures dampen demand more than expected or if the global economy shows unexpected signs of weakness.
Future Monetary Policy: A Close Look at the Data Without Binding Yourself
Looking ahead, the ECB confirmed that the Governing Council is determined to ensure a return timely inflation to the 2% target in the medium term. “The Council will follow a data-driven approach, adjusting its interest rate decisions based on the inflation outlook and the latest economic and financial data,” the Eurotower stressed. This means that decisions will be defined on a case-by-case basis at each meeting, “without being tied” to a particular monetary policy path.
In this context, the ECB has emphasized its willingness to maintain full flexibility in decisions on interest rates, stating that does not intend to bind itself to a given path. “Interest rate decisions will be based on the assessment of the inflation outlook, in the light of the latest economic and financial data, underlying inflation dynamics and the strength of monetary policy transmission,” the bulletin reads.
Market Reactions: Interest Rates and Government Bonds
The ECB has carefully observed how the first rate cut has affected i markets. From 6 June to 11 September 2024, before the second “mini-cut” in September, risk-free interest rates in the Eurozone fell across all maturities, with market participants expecting faster-than-expected rate cuts. At the end of the period, the forward rates They indicated about 60 basis points of cumulative reductions by the end of the year, an advance on the 25 basis point cut already expected and, all things considered, well digested by the markets.
Also long-term nominal interest rates have decreased, thanks to the reduction in inflation compensation and the decline in real rates. Naturally, this has had an effect on the government bond yields, such as Italian BTPs, German Bunds and French OATs, although to a lesser extent than risk-free rates, creating a slight increase in spreads.
