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Eurozone recession risks rise as inflation falls sharply – ANZ

Brian Martin, Head of G3 Economics at ANZ Research, points out that the euro zone is at risk of further declines as inflation retreats at an accelerated pace.

The improvement in inflation in the Eurozone is increasingly sustainable

The data confirm a progressive and sustained improvement in Eurozone inflation. In the near term, risks to underlying price pressures appear to be tilted to the downside as the lagged effects of earlier monetary tightening and faltering economic activity weigh.

Despite these downward pressures, we estimate that if the current monthly trend in the core HICP is maintained until 2024, inflation will converge towards the target sooner than expected by the European Central Bank.

Economic data confirms the effectiveness of monetary tightening. GDP growth is stagnating, partly due to rising interest rates, tightening bank lending conditions and weakening credit growth. The M3 money supply fell 1.2% year-on-year in September, meaning that annual growth is negative in real terms when inflation is taken into account. Our calculations estimate that the actual M3 stock is now just 3.0% above pre-COVID levels. Credit growth to non-financial corporations (SNF) has also slowed sharply (0.2% year-on-year in September) and is negative in real terms. In its short history, the Eurozone has not escaped recession during severe credit downturns.

Activity data disappointed at the beginning of the fourth quarter. The preliminary composite PMI fell 0.5 points in October to 46.5, its lowest reading since the war in Ukraine began and the lowest since November 2020, when the economy was partially shut down due to COVID. The composite PMI is now at levels when the European economy was hit by the debt crisis that followed the global financial crisis. Historically, this indicator of economic activity has not been lower than during the Global Financial Crisis and the pandemic. It reflects the difficult economic conditions of manufacturing and, increasingly, services.

China’s weak recovery is also contributing to weak export demand. In the first eight months of the year, exports to China fell 0.7% year-on-year. China is the second destination for European Union exports. Exports to other large Asian partners in the same period are also weak. Exports to Japan have fallen by 5.5% year-on-year and to South Korea by 1.8% year-on-year. Each of them represents approximately 25% of the volume of exports to China.

Source: Fx Street

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