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ING: ‘Temporary’ recession scenario in the eurozone possible – Greece ‘champion’ in inflation

Her Eleftherias Kourtali

ING maintains a stable assessment of growth in Greece this year, as noted in its new report on the outlook for the global economy, placing it at 2.9%, while it continues to see a recession in the second and third quarters of this year in some European economies and estimates that the eurozone is likely to experience a quarter of negative growth this year. Regarding the next two years, it predicts a further slowdown in the growth of Greece, at 2.4% in 2023, while at 2.2% from 1.9% before placing the estimated increase in Greek RES in 2024.

On a quarterly basis, despite the effects of the war and the inflation crisis, ING sees growth of 3% for Greece in the current quarter and a slowdown to 2.2% in the third quarter, while growth will move to 2.5% in the fourth quarter of the year, with the first quarter of 2023 falling to 2%.

According to ING’s baseline scenario, the eurozone will grow at a rate of 2.3% this year, while it expects a recession in Germany of 1.4% in the third quarter, as well as 1.5% in Ireland. and in the Netherlands in the fourth quarter (-0.1%), with the Netherlands also falling marginally into recession (0.1%) in the third quarter. For 2023, growth in the euro area will slow significantly to 1.6%, according to the Dutch bank, while GDP will move to 1.5% in 2024. Portugal is expected to record the highest growth rates in the eurozone this year, at 6%, followed by Spain at 4%.

As far as the inflation front is concerned, it is expected to remain unpleasantly high and in the short term it is unlikely that there will be a major break for the central banks, while the outlook for 2023 and 2024 is also covered by uncertainty. According to the estimates of the Dutch bank, inflation in Greece is expected to peak in the second quarter, while for the whole year it places it at 8.1% from 7.1% forecast a month ago, the highest among all its countries. eurozone. In 2023 it estimates that it will decline to 2.4% and in 2024 to 2%. At the same time, it places inflation at 6.4% in the eurozone this year, while in 2023 and 2024 it will fall to 2.5% and 2.2% respectively.

As ING notes, persistent headwinds are pushing the eurozone into a “muddling through” scenario, meaning “seeing and doing” temporary solutions and reluctance, and there is a good chance the region will see a quarter of negative growth this year. However, persistent inflation and higher inflation expectations will force the European Central Bank to abandon negative interest rates in the third quarter.

Goodbye to negative interest rates

In a blog post on the ECB’s website, President Christine Lagarde outlined the growing consensus on the board that more persistent than expected inflation requires the rapid lifting of unconventional policy measures. A first rate hike in July seems almost certain and a 50 basis point increase cannot be ruled out, especially if inflation is higher than expected in view of the July meeting. In any case, as ING points out, the negative interest rates will have disappeared in September. It now appears that the ECB wants to seize the window of opportunity to normalize monetary policy. This requires policymakers to draw a fine line between rising inflation expectations and adverse economic winds.

Mixed data for the economy

The first quarter showed an upwardly revised growth rate of 0.3% on a quarterly basis, but the second quarter looks more like an enigma, the Dutch bank notes. There are no official economic data yet and climate indicators do not give a clear picture. Consumer confidence has plummeted since the start of the war in Ukraine, with May figures showing almost no improvement. However, business confidence figures remained better and continued to decline.

The eurozone composite PMI reached 54.9, well above the recession level of 50. This is largely due to a strong services sector, which seems to be benefiting from some demand coverage after the pandemic. Indeed, holiday bookings are back or even above pre-pandemic levels. In the manufacturing sector, the slowdown is more pronounced due to renewed supply chain problems, higher input prices and falling orders.

Not exactly the golden decade of the ’20s

As ING points out, there is no clear weakening in the labor market yet, but wages, although rising a little faster now, certainly do not keep pace with inflation. At the same time, oil prices have risen, further reducing household purchasing power. Therefore, the Dutch bank does not believe that consumption will be a strong growth driver in the coming quarters. Businesses can also become more careful about their investment plans.

In addition, it seems that there is still a willingness among governments to support the weakest households with fiscal measures. And as the European Commission has proposed extending the Stability and Growth Pact escape clause until 2023, no major fiscal tightening should be expected at this time.

“We still believe that the second or third quarter of this year may see negative growth in the eurozone. Then we believe that the growth pattern will be largely muddling-through. This will continue to result. “GDP growth of 2.3% in 2022 and 1.6% in 2023. Not a recession, but not exactly the 1920s. And the risks will continue if they exist,” said ING.

Higher inflation expectations

Excluding a strong rise in gas prices amid fewer imports (or supply disruptions) from Russia, inflation is likely to be close to its peak. In May, headline inflation rose to 8.1%. ING expects the decline to be very gradual and may have to wait until the second half of 2023 before headline inflation falls below 2% again. At the same time, consumers’ longer-term inflation expectations are now up 3% in the latest survey, which explains why the ECB wants to pull interest rates out of negative territory very soon.

In an interview, Philip Lane, the ECB’s chief economist, made it very clear that this should be completed by September. What happens next will depend on the data. ING does not believe that a wage-price spiral will develop, as in the most recent wage agreements the increase projected for 2023 is only 2.4%, below the 3% that the ECB considers to be in line with its inflation target. 2%. So, logically, the ECB will want to get a little closer to the elusive “neutral interest rate”.

Source: Capital

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