The eurozone is handling Putin’s shock better than expected. Confidence indicators are recovering, wholesale gas prices have corrected. Our recent upward revisions to growth in the US and China add to the positive momentum. We now expect the Eurozone economy to grow by 0.7% instead of 0.5% in 2023 and by 1.6% instead of 1.5% in 2024. At the beginning of the year, we predicted a 0.2% fall in Eurozone GDP in 2023. less sluggish growth, we now see the European Central Bank (ECB) raising interest rates by another 100 basis points instead of 75 basis points, i.e. by 50 basis points in March and by two – instead of one – 25 m.p. in the second trimester. And after; Already since December, its president, Christine Lagarde, has given a clear signal: she wants to go well beyond the 50 bp move. at the ECB meeting on 16 March. So it’s possible that his deposit rate will end up reaching 4% rather than peaking at 3.5% as we currently predict.

The ECB has long underestimated the structural upward trend in core inflation. We believe he has now made the reverse mistake of expecting Putin-driven inflation to last longer than seems likely. While the ECB aims to keep inflation averaging 3.4% in 2024, we expect inflation to fall to 2.4% next year, based on its December staff forecast. The ECB is concerned that a) inflationary expectations may not be justified and b) trade unions may push up prices and wages. If our inflation forecast is correct, these two risks will be much more limited than the ECB believes. Wage dynamics in the euro area usually lag behind large fluctuations in inflation. After years of restrictions, wages could rise by 5% this year, the ECB expects, before falling to nearly 4% in 2024. With the ECB projecting only 0.1% year-on-year labor productivity growth in 2023, it estimates that there will be an excessive 5% increase in unit labor costs. However, we believe that further easing of supply pressure will lead to a 0.5% increase in output and productivity this year. If this is the case, then the increase in unit labor costs that companies are willing to pass on to end consumers will be correspondingly smaller.

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