ECB, upward estimates on eurozone GDP in 2023: inflation improves

After “the previously expected contraction was avoided” in 2022 in the base scenario elaborated by Frankfurt, “the economy should recover in the coming quarters”. The economic bulletin also points out that “industrial production should increase with the further improvement in supply conditions, the continued easing of the climate of confidence and the elimination of the numerous unfulfilled orders by businesses”

The European Central Bank revises its estimates for the Eurozone’s GDP upwards by 0.5 percentage points, which in 2023 should fall to 1% from 3.6% in 2022. The ECB’s estimates also improve “considerably”. inflation, given in the new economic bulletin as below 3% by the end of 2023, one point lower than the December estimates thanks above all to falling energy prices. But for the Central Bank, the risks for growth prospects are oriented towards the downside, due to the war and to the tensions on the markets which, if they continued, would undermine confidence and tighten credit conditions.

“Strengthening growth in 2024-2025 turns out to be lower than December projections”

“Projections for growth in 2023 have been corrected upwards in the baseline scenario, reaching an average of 1.0 per cent due to both the fall in energy prices and the greater resilience of the economy in the face of the difficult international context “, reads the monthly bulletin of the European Central Bank. ECB experts also expect growth to increase further, “to 1.6 per cent in both 2024 and 2025, supported by the strength of the labor market, the improvement in the climate of confidence and the recovery of real incomes”. At the same time, “the strengthening of growth in 2024 and 2025 is lower than the December projections, reflecting the more restrictive monetary policy”.

“War in Ukraine remains downside risk to recovery”

For Frankfurt “the unjustified war waged by Russia on Ukraine and its population continues to represent a significant downside risk for the economy and could once again push up the costs of energy and food goods. A further brake on growth in the area of the euro could also derive from a possible weakening of the world economy more abruptly than expected”. As regards the labor market in the euro area, the ECB notes that it “continues to show strength, despite the weakening of economic activity”. The number of employed people grew by 0.3 percent in the fourth quarter of 2022 and in January 2023 the unemployment rate remained at an all-time low of 6.6 percent. According to the central bank experts’ baseline scenario, “the economy is expected to recover in the coming quarters. Industrial production is expected to increase as supply conditions improve further, the climate of confidence continues to ease and the disposal of numerous unfulfilled orders from businesses. The increase in wages and the drop in energy prices will partially compensate for the loss of purchasing power that many families feel due to high inflation”.

“Good bank holding capacity, ready to give liquidity”

The Governing Council of the ECB “stated that the euro area banking sector is resilient, with solid capital and liquidity positions”. The monthly bulletin adds that “in any case, the ECB has all the necessary tools to provide liquidity to support the euro area financial system, should it be needed, and to preserve the orderly transmission of monetary”. As for the loans granted by banks to euro area businesses, “they have become more onerous. Credit to businesses has further decreased, as a result of lower demand and more restrictive supply conditions. The cost of lending has also increased household debt, mainly due to rising mortgage rates”. The ECB underlines that “the higher costs of borrowing and the consequent drop in demand, together with more rigid credit granting criteria, have led to a further reduction in the growth of loans to households”.

“The rate hike will affect the real economy and growth”

The central bank then analyzed the consequences of its monetary policy, underlining that “the further rate increases expected by the markets will increasingly be transmitted to the real economy, with additional dampening effects deriving from the recent tightening of credit supply conditions. This, together with the gradual phasing out of fiscal support measures and continued concerns about the risks to energy supplies next winter, will negatively affect economic growth in the medium term.” The bulletin specifies that “the euro area economy stagnated in the fourth quarter of 2022; the previously expected contraction was therefore avoided. However, private sector domestic demand fell sharply. The high inflation, the current uncertainties and tighter financing conditions have compressed private consumption and investment, which decreased by 0.9 and 3.6 percent respectively.According to the baseline scenario, the economy is expected to rebound in next quarters”.

“Btp spread down 36 basis points between December and March”

The ECB experts have explained that “with the escalation of tensions on the markets, the share prices of European banks have fallen and the risk appetite of market operators has decreased drastically, triggering a drop in yields on government bonds in the area compared to swap rates. The weighted average yield for GDP of ten-year government bonds closed the reference period at 24 basis points below the level of mid-December 2022”. For Frankfurt, this decline “reflected a contraction in the yield spreads of government bonds in the various countries. For example, the spread on Italian ten-year government bonds fell by 36 basis points, while the same spread on Greek bonds and Germans decreased by 28 basis points”.

“Energy prices declining, anti-shock measures begin to return”

The bulletin also addresses the energy issue, explaining that thanks to more secure supplies, “the dynamics of energy prices have moderated considerably, the climate of confidence has improved and a slight recovery in activity is expected in the short term. Falling energy prices are currently leading to some cost easing, particularly for energy-intensive sectors, and global supply-side bottlenecks have largely disappeared. of rebalancing in the energy market and an improvement in real incomes”. According to Euro Tower experts, “Public interventions aimed at protecting the economy from the impact of high energy prices should be temporary, targeted and modulated in order to preserve the incentives for lower energy consumption. As energy prices fall energy and the mitigation of risks for related supplies, it is important to initiate the return of these measures in a timely and agreed manner “. “Given the more favorable outlook for energy commodity prices – reads further on in the bulletin – fiscal measures are expected to play a somewhat lesser role in containing energy prices in 2023 and, with the withdrawal of these measures minor energy inflation is now expected to rebound in 2024.”