Xinhua Finance Frankfurt, January 1 (Reporter Shao Li) In 2023, although the inflation level in the euro area has dropped significantly, economic growth tends to stagnate, and the restraining effect of high interest rates on the economy is still intensifying. Authorities, including Europe** banks, believe that there will be no severe recession in the eurozone in 2024 and low growth will still be achieved. But a growing number of economists are warning that the risk of stagflation in the eurozone is real and that the economic recovery faces great uncertainty.
Judging by the data that has been published, the slowdown in the eurozone in 2023 has significantly exceeded the ECB's expectations. Inventories investment contributed negatively to GDP growth in three of the four quarters since the fourth quarter of 2022, suggesting that the eurozone is still in a destocking cycle.
Eurozone purchasing managers pointed out that the PMI figure shows that the manufacturing industry in this region has been operating below the 50 boom and bust line for more than a year, and the composite PMI has been below this level for as many as seven months. A technical recession in the second half of 2023 (two consecutive quarters of GDP declines, Eurozone Q3 GDP -0.).1%, zero year-on-year growth) is very likely.
Chart 1 Changes in PMI of PMIs in the Eurozone PMI.
Data**: S&P Global & Bank of Hamburg.
Note: 12 2023 is the preliminary value.
The ECB's latest** believes that Eurozone GDP growth in 2023 will increase from 34% fell back to 06%。At the same time, the central bank further lowered its growth forecast for 2024 (0.).8%）。
The central bank also made it clear that the expectation of economic recovery in the eurozone in 2024 is based on the premise that private consumption and exports will increase, and at the same time, there will be no new adverse shocks and confidence may be restored.
The outlook for the eurozone's two largest economies, Germany and France, is not encouraging. In 2024, the eurozone will not only face uncertainty about the decline in inflation, but there may also be a risk of crisis in the financial system.
International authorities are very unanimous in their outlook on the downward revision of the eurozone's growth forecast for the coming year (see Chart 2), but there is some disagreement on the direction of inflation in the region in 2024. Unlike the European Central Bank, the European Commission and the International Monetary Organization have raised their latest inflation forecasts.
Figure 2 International institutions' assessment of the Eurozone's GDP growth and inflation rate over the next two years**.
*: European Central Bank.
Note: *Global Macroeconomic Research, a London-based company that surveys more than 700 economists monthly.
In fact, since the ECB's December monetary policy meeting, there have been a series of events that have been very negative for the downward trend of inflation in the eurozone.
First, the intensification of the Red Sea crisis has significantly pushed up freight and hindered a further pullback. It is difficult to assess how long the Red Sea crisis will last and to what extent its impact on the European chain will rise, but it is certain that geopolitical risks are still on the rise, increasing the uncertainty of a pullback in inflation.
Second, Germany's sudden resumption of the "debt brake" has led to a 33%-50% chance of carbon emissions, and the abolition of agricultural diesel subsidies is not conducive to the expected decline in food growth.
Commerzbank reported that inflation in Germany could be close to 4% again in January. The indicator fell to 32%, the lowest level in two and a half years.
A survey of thousands of companies conducted by the IFO Institute for Economic Research in Munich also showed that the December ** expectation index climbed significantly compared to the previous month. In the coming months, there will be a significant increase in the number of companies expected to improve. This means that the decline in inflation may stop for a while.
Analysts pointed out that the ECB originally expected that the withdrawal of relief measures implemented since 2022 would have little negative impact on the eurozone economy, but the sudden "brake" in Germany made such a judgment uncertain.
Friedrich Heinemann, an economist at the Leibniz Center for European Economic Research in Mannheim, Germany, said that Europe** was already celebrating the expected interest rate cut, and the market-priced medium- and long-term financing rates had also fallen sharply. This weakens the ECB's all-out efforts to control inflation, and the sooner it is expected to cut rates, the later the actual rate cut will come. January's inflation data will be crucial in determining the rate cut.
The German DAX index hit record highs almost every day in December. However, the expectations of the business are completely different from this. Of the 47 associations surveyed by the German Institute for Economic Research (IW) in Cologne, 30 believe that the current situation is worse than it was a year ago during the energy crisis. These include key industries with large employees, such as mechanical engineering, electrical, construction, and retail.
The KFW-IFO SME business climate index released by KfW in December fell significantly again after only two months of recovery, with companies looking more pessimistic about the next six months, especially in the manufacturing sector. The business climate index of large companies also fell during the month. Moreover, the sales of small and medium-sized enterprises are expected to rise for four consecutive months, which has exceeded the long-term average. The policy bank believes that the road to achieving the inflation target is becoming more bumpy.
Carsten Brzeski, head of macro research at ING, said the risk of stagflation in the eurozone was real. In response, the ECB's policy focus is on inflation rather than tackling economic stagnation.
Since the market has priced in advance for inflation to fall in Europe and the United States, interest rate cuts, and a soft landing of the economy, there is a high possibility of sharp fluctuations in the financial market once there is an accident, which has buried a lot of hidden dangers for the risk of crisis in the European financial system.
Not only that, but the effects of the most aggressive monetary tightening in the eurozone's history are still ongoing. While the current rate of decline in bond yields is even faster than inflation, this does not change the fact that the debt of the eurozone countries is growing rapidly. The real estate industry also has a similar financing risk problem. The sluggish economic outlook also threatens the ability of non-bank institutions to repay their debts. Overall, the outlook for financial stability in the eurozone remains fragile and faces many uncertainties.
According to the European Central Bank, residential real estate loans accounted for about 30% of total bank loans in the eurozone at the end of 2022, while commercial real estate accounted for about 10%. One-third of all real estate loans are granted to real estate companies (the bank's exposure is about 13%).
The ECB noted that eurozone banks' exposure to the commercial real estate market, while small and unlikely to lead to systemic risk in itself, could be magnified if losses in this area were magnified under broader market pressures.
Between February 2022 and March 2023, Moody's rated 40% of European real estate companies negatively, noting that 70% of them had deteriorating debt-to-asset ratios.
The ECB believes that the rising cost of financing could lead to a doubling of the proportion of loans issued by banks to loss-making real estate companies, and the risk of bank lending to real estate companies should not be underestimated, given that the higher financing costs and lower profitability of real estate companies will continue for several years.
Editor: Luo Hao.
Statement: Xinhua Finance is a national financial information platform undertaken by Xinhua News Agency. In any case, the information published on this platform does not constitute investment advice. If you have any questions, please contact customer service: 400-6123115