ECB Survey Shows Slightly Pessimistic Outlook for Euro Zone Economy
A recent survey conducted by the European Central Bank (ECB) has revealed a slightly pessimistic outlook for the euro zone economy. The survey indicated that core inflation in the region will fall at a slower rate than previously anticipated, as wage growth is expected to accelerate in a tight labor market. Additionally, economic activity is projected to stagnate in the current quarter.
The ECB’s closely watched indicator, core prices in the euro area (excluding energy, food, alcohol, and tobacco), is forecasted to rise by 5.1% this year and 3.1% next year, according to the ECB’s Professional Forecasters Survey (SPF). These figures are higher than the previous survey conducted in May, indicating a faster inflation rate. Furthermore, the survey revised the unemployment rate forecast down to 6.6% for this year and 6.7% for next year.
Nominal wage growth is expected to reach a record high in 2023, as workers strive to compensate for their previous losses. This rapid rise in wages could potentially accelerate inflation and lead to further interest rate hikes by the ECB. Responding to these findings, the ECB stated, “The upward revision reflects the results of recent data showing more persistence than expected, as well as higher expectations for wage growth.”
At a policy meeting held on Thursday, the European Central Bank policymakers decided to raise interest rates for the ninth consecutive time. However, ECB President Christine Lagarde indicated that the next steps regarding interest rate hikes are yet to be determined, and there is a possibility of pausing the rate hikes.
In addition to the inflation concerns, the ECB also highlighted that the level of activity among large companies in the euro zone has reached a standstill. These companies are not showing any signs of improvement in the current quarter, and the risks lean towards a more negative outcome. Various economic indicators, such as PMIs, GDP, and lending data, have indicated weaker economic performance, with the risk of recession increasing. The survey of 73 companies further contributed to this already bleak outlook.
Despite these challenges, the survey did suggest some positive news for the ECB. Wage growth is expected to moderate moderately next year, which could alleviate concerns over rising labor costs. Companies surveyed expect a slowdown in wage growth to 4.7% in 2024, compared to approximately 5.5% this year. The survey noted that around half of the respondents anticipate similar wage growth in 2024 as in 2023, while 40% believe that wage growth will be lower next year.
Overall, the ECB survey presents a cautionary view of the euro zone economy, with lingering inflation concerns and stagnant economic activity. The ECB must carefully monitor wage growth and make appropriate policy decisions to ensure stability and balanced economic growth in the region.