As the gloomy 2022 draws to a close, the outlook for 2023 continues to improve. Following the release of US economic data, inflation is now reaching its peak in Europe as well. Energy prices and risks of natural gas shortages are declining. As a result, companies are beginning to look at the European winter downturn in light of a new recovery that we expect to begin in late spring. In the absence of another major shock, we can expect a rapid decline in inflation and a strong recovery in economic activity in 2023, when Europe weathers the winter. And while the Fed has to contend with domestic inflation driven by excessive US fiscal stimulus in 2020 and 2021, the ECB has to deal with rising inflation driven in large part by rising energy and food prices due to Vladimir Putin’s war. v. Ukraine, growth is exacerbated to some extent by global pressure on the supply chain. We see no signs of excess demand in the euro area.

On the contrary, the forecast of inflation in the Eurozone is determined by two main factors. As the higher cost of energy is passed along the production chain over time, inflationary pressures spill over into non-energy goods and services. And as energy prices have receded from their peak, energy’s direct contribution to core inflation is already declining. German Producer Price Data (PPI) provides some insight into the balance of these two forces. With energy prices falling 9.6% m/m in November after falling 10.4% in October, inflation at the energy producer level fell sharply to 65.8% y/y in November from 85.6% in October and reached peak at 139%. in August. However, even excluding energy, PPI inflation eased to 12.7% year-on-year in November from 13.6% in October and a peak of 16.5% in August. In addition to reducing pressure on energy prices, two other factors are likely to reinforce the downward trend in core inflation in Germany and the eurozone from spring 2023. First, the winter recession will limit the price power of producers. Second, the pressure in global supply chains looks set to ease significantly after the current winter wave of the pandemic in China ends.

* Mr. Holger Schmieding is an economist at Berenberg Bank.