European Economic Comment "Eurozone: Tracking the energy shock impact" Fischer

Research evidence excerpt

European Economic Comment "Eurozone: Tracking the energy shock impact" Fischer

pean Commission survey, corporate selling

price expectations appear to be moderating in the latest data, in contrast to PMI price

indicators. They remain higher in industry and services than in retail and construction.

Inflation so far driven by energy, indirect effects expected later this year

Eurozone inflation has risen by 1.3pp since the start of the Middle East conflict, reaching

3.2% in May, largely reflecting higher energy prices. Absent a further spike in oil and gas

prices, this may mark the peak. That said, we expect inflation to remain elevated, at

around 3% for the rest of the year, as higher energy costs gradually feed through into

food and goods prices. Overall, we forecast inflation to average 2.8% this year, before

slowing to 2.3% in 2027 and 2% in 2028.

Sentiment indicators point to rising risk of technical Eurozone recession

Growth data suggest a further loss of momentum, with the Eurozone Composite PMI

falling to an 18-month low of 48.5 in May. The April/May average is below Q1, signalling

not only a slowdown but also rising risks of contraction. After Eurozone GDP declined by

0.2% q/q in Q1 (revised from +0.1% q/q), this points to a greater likelihood of a

technical recession. That said, the Q1 weakness largely reflected developments in

Ireland, while Germany, Italy and Spain recorded solid growth. On the labour market -

crucial for assessing second-round inflation risks - sentiment data are also weakening.

Employment in the PMIs is contracting and two standard deviations below the May

2022 levels. At the same time, households’ unemployment expectations have increased.

Second-round effects in wages: minimum wage increase in France