The medium-term outlook for EZ equities has improved significantly in the past 12 months...
...But earnings expectations have to fall further in the near term, weighing on prices over the summer.
EZ manufacturing will slow sharply in Q2; core inflation pressures in France have intensified.
Claus Vistesen (Chief Eurozone Economist)Eurozone
The euro area’s primary budget balance swung to a significant deficit during the pandemic.
We think the primary deficit will narrow through 2024, but the balance will remain in the red.
Net interest costs will rise, but we think the debt-to-GDP ratio will fall, due to robust nominal growth.
Melanie Debono (Senior Eurozone Economist)Eurozone
Italy will probably avoid entering a technical recession in Q2, as services activity rebounds strongly...
...But we now expect an EU ban on gas imports from Russia, which will weigh on growth in H2.
Our forecasts for Spain are unchanged from March as recent developments offset each other.
Melanie Debono (Senior Eurozone Economist)Eurozone
Inflation rose again in April, and the risk is that it will creep even higher as price increases broaden.
Energy inflation should continue to fall, but will remain elevated through Q2, at least.
The ECB will have to lift its inflation forecasts in June before starting to hike rates, probably in September.
Melanie Debono (Senior Eurozone Economist)Eurozone
The ECB is holding the line that QE will end at the beginning of the third quarter.
We still look for two hikes in the deposit rate this year, by 25bp in September and December.
Data today likely will show that EZ industrial production, ex-construction, rose solidly in February.
Claus Vistesen (Chief Eurozone Economist)Eurozone
The ECB will stick to the script today; net asset purchases will end in Q3, data permitting.
We are more hawkish than the consensus on rate hikes in 2022, but more dovish for the 2023 outlook.
Is the ECB developing a new QE tool, and if so, does that mean an end to "sequencing"?
Claus Vistesen (Chief Eurozone Economist)Eurozone
- Inflation in the Eurozone was still soaring at the end of Q1, and it could well go higher still.
- Energy inflation is a wildcard; we think it will remain above 40% y/y through April and May.
- The ECB will have to lift its inflation forecasts again; QE will end in June, with a rate hike in September
Claus Vistesen (Chief Eurozone Economist)Eurozone
- Italy is the second-most reliant major EZ economy on Russian gas, after Germany.
- Cutting reliance on Russian gas is already hurting industry; we are revising down our GDP forecasts.
- We have revised up our EZ inflation estimate for March, after Spanish & German headlines surged.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Spain's economy ended last year further below its pre-virus level than other major EZ economies...
- ...Now growth is slowing, and the outlook for Q2-Q4 is clouded by a hit to real incomes.
- The IFO was miserable in March, and real M1 growth points to an EZ PMI of 50 by summer.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- The Swiss franc has eased back from parity against the euro in recent days...
- ...It will strengthen again before the end of ECB, QE, likely to 1.01-to-1.02, but will re-weaken in Q3.
- With inflation set to fall below target in H2 this year, the SNB will not hike rates in line with the ECB.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Italian government bond yields likely will rise further in the run-up to the end of QE...
- ...But they will reverse some of their increase later in the year, even as the ECB tightening cycle begins.
- EZ headline inflation could hit 7% in the second quarter, with core inflation rising to just over 3%.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- The ECB will highlight Ukraine as a downside risk to GDP growth today, pledging action if needed...
- ...But we still think the central bank will announce its intention to wind down the APP, by October.
- Could the ECB raise rates while still doing QE? Not based on current guidance, but this could change.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- We are revising down our euro area GDP forecast for this year, by 0.6pp to 3.2%.
- In a mild scenario, the war between Ukraine and Russia shaves 0.3pp off our 2022 forecast...
- ...But in a worst-case scenario, where the war lasts past this year, GDP growth would be 1.5pp lower.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Consumption had a rough start to Q1, as restric- tions were tightened at the end of December...
- ...But things now are looking up and we think high inflation won’t derail the consumer recovery.
- Volatility is the name of the game in markets for now; a return to pre-Ukraine normality is a long way off.
Melanie Debono (Senior Eurozone Economist)Eurozone
- EU Recovery funds are flowing to EZ economies but nowhere near as fast as the EC had forecast.
- We think the bulk of funds won’t be spent, and probably not even received, until after this year.
- We are raising our forecast for EZ inflation for Febru- ary out today; we look for a 0.5pp increase to 5.6%.
Melanie Debono (Senior Eurozone Economist)Eurozone
- A new and more uncertain reality is emerging in Europe; defence spending will accelerate.
- The ECB’s initial response to a war in Ukraine will be to pause, but the inflation challenge isn’t going away.
- War in Ukraine risks another surge in oil and gas prices, boosting energy inflation.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- We still think EZ core inflation is on track to hit 3.0% in Q2, underpinning the hawkish shift at the ECB.
- We now think the central bank will lift its deposit rate by 20bp in December, after ending QE in October.
- Soft GfK consumer confidence data in Germany, but solid INSEE business sentiment numbers in France.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- PMI data for February surprised on the upside; services activity is rebounding faster than expected.
- We are raising our Q1 EZ GDP growth forecast, by 0.3pp, to 0.5% quarter-on-quarter.
- Pricing intentions surged again, piling pressure on the ECB to unwind stimulus measures.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Comments from Mr. Lane and Ms. Schnabel add to evidence of a hawkish shift in ECB policy.
- French core inflation fell in January, but it will re- bound quickly, to 2.0%, where it will stay through Q3.
- EZ construction fell in Q4, again, and consumer sentiment remained soft midway through Q1.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- Slowdowns in Germany and Austria weighed on the Eurozone economy in the fourth quarter…
- …But employment rose strongly, consistent with robust surveys and monthly claims data.
- The Eurozone's trade deficit widened in December, thanks to soaring imports.
Claus Vistesen (Chief Eurozone Economist)Eurozone
