Eurozone inflation set to soar, fans recession risk

Shelves full with fruit are pictured at a supermarket during the spread of the coronavirus disease (COVID-19) in Berlin, Germany, March 17, 2020. REUTERS/Fabrizio Bensch

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BENGALURU, April 7 (Reuters) – Eurozone recession risks are rising, eurozone inflation is set to soar for the rest of 2022 and the European Central Bank is expected to raise its deposit rate by the end of of the year, according to a Reuters poll.

While inflation hit a new high of 7.5% in March, there are still months to go before a peak as Russia’s war in Ukraine continues to drive up food and energy prices , suggesting that higher price increases may take root. Read more

With the eurozone economy recovering, unemployment at an all-time high and nearly all other peer central banks now tightening policy, the ECB is expected to end its asset purchases this year and raise its rate for the first time in over a decade.

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Of the 41 of 53 respondents to an April 1-6 poll who expected the deposit rate to drop from a record low of -0.50% this year, 30 expect it to do so in the fourth quarter. , 11 stating that it will happen as soon as possible. in July-September, up from six in a poll last month. None expected a rate hike by the middle of the year.

However, the policy space is shrinking for the ECB, with a median 30% probability of a recession this year and the Eurozone’s proximity to the Russia-Ukraine war leaving it most vulnerable.

“There is a risk that the economic impact of the war will be a little worse than expected, or that the situation will deteriorate further,” said Gordon Scott, eurozone economist at RBC. “A recession therefore remains a significant possibility, about a 30-40% chance at some point over the next year.”

Forecasters who in March expected the recovery to continue as businesses reopen after the wave of the Omicron variant have now downgraded their economic growth forecast to just 0.4% for this quarter. , less than half of what was expected a month ago.

It was then expected to rise to 0.6% in the third and fourth quarters. The eurozone economy is expected to grow 2.9% this year and 2.3% next, compared to 3.8% and 2.5% forecast a month ago.

Growth forecasts for 2022 in Germany, Europe’s largest economy, have been nearly halved to 2.2% from 4.0% in the previous quarterly survey in January. Growth forecasts in France and Italy were revised down to 3.2% and 2.8% from 3.7% and 4.2% respectively.

All but two of 39 economists said a further escalation of the war in Ukraine is the biggest risk to the eurozone economy over the next 12 months. Both said the biggest risk is a resurgence of COVID-19.

This year’s inflation forecast has risen for the 10th consecutive survey – to 7.3%, 6.9% and 5.8% for the second, third and fourth quarters, respectively, from 5.3%, 4, 5% and 3.3%, in the March poll, well above the ECB’s 2.0% target.

Reuters poll – Eurozone inflation and growth outlook

The bloc’s three largest economies – Germany, France and Italy – have seen a significant improvement in annual inflation forecasts for this year.

Although ECB President Christine Lagarde said the bloc was at no risk of stagflation – a prolonged period of stagnant growth and sharp price increases – 21 out of 38 economists, or 55%, saw it as a high probability. or very high over the next two years. The other 17 said the risk was low.

About half of respondents, 18 out of 39, said it was only a matter of time before wage growth, a key indicator of second-round inflationary effects follows. The others, 21, disagreed.

“A price-wage spiral cannot be ruled out… Record inflation could mean that workers and unions with bargaining power will push harder for higher deals,” said Simon Wells, chief economist for the Europe at HSBC.

“So far, however, requests have been quite restrained – although the fall will be a test with big flagship deals likely.”

Reuters Poll-Eurozone Economic Outlook

Unemployment in the eurozone, which fell to a record low of 6.8% in February, is expected to rise only slightly and average 6.9% this year and next.

(For further articles in the Reuters Long-Term Global Economic Prospects Polls Brief)

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Reporting by Swathi Nair; Poll by Anant Chandak and Shaloo Shrivastava; Editing by Bradley Perrett

Our standards: The Thomson Reuters Trust Principles.

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