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Deutsche Bank explains how the eurozone could be headed for a double recession in a year


The euro area economy is losing momentum amid an environment dominated by high inflation and rising interest rates. Although economic activity and above all, Labor markets are offering more resistance More than initially expected, a recession in the old continent seems almost inevitable. This scenario is considered in the forecasts of many organizations and research departments of financial institutions. Among the latter are economists at Deutsche Bank, who have included the euro zone’s outlook in their latest forecasts. Falling into a double dip. According to German bank analysts, this has become the second biggest risk (after inflation) for the eurozone in the coming quarters.

Euro area GDP grew by 0.3% in the third quarter of this year, a figure that has surprised growth, but which reflects the sharp slowdown that the monetary bloc is suffering. A new report by fifteen Deutsche Bank (DB) economists and published this Monday warns that the economy’s Eurozone may already have contractedstarting a recession that could end A ‘false’ start in the early part of 2023 and a later restart.

This false start will coincide with the arrival of good weather (spring-summer) and the reactivation of tourism, a sector that continues to gain weight in a European economy that is increasingly intensive in services. However, DB experts believe that after this relief, the risk of the economy slipping into a double recession in the latter part of 2023 is increasing.

This situation can create a kind of mirage. DB analysts believe that with the arrival of spring it may seem that the euro zone economy will flourish and leave behind the dangers of recession and winter. However, “the growth challenge will not end in the spring. There are strong headwinds to recovery in 2023, ranging from a projected recession in the US (one of the eurozone’s main trading partners), to the associated loss of competitiveness with energy (many industrial companies will leave the eurozone due to rising energy bills) and the delayed effects of substantial monetary tightening.

Although interest rates are rising now, it will not be for another 6 months or even a year when the full impact of monetary tightening will be felt. According to German bank analysts, the ECB’s terminal rate (the peak of interest rates) could be 3%, a region it will not reach until mid-2023. For this reason, Deutsche Bank has reduced its 2024 GDP forecast to 1% from the previous 1.4%. “However the risk is that there will be a recessionary double dip between 2022 and 2023.” The recession will not be as deep as feared, but there will be significant volatility.

difference between north and south

This double decline will take place between the end of 2022 and the whole of 2023, when an annual GDP contraction of 0.6% is expected in the euro area, although with significant differences between countries. Austria, France, Italy, Germany (-1%), Belgium and Finland are the countries that will record contraction in GDP for the whole next year. whereas Spain will record zero growth, Portugal by 0.1%, Greece by 0.3%, the Netherlands by 0.5% and Ireland by 1.5%. Facing the 2008 crisis or the Covid-19 crisis, this time it will be the major countries who will bear the brunt.

“The recession has already begun, but it looks like it is going to be shallower and longer in winter than previously feared. The risk now is a double dip recession in 2023 due to significant headwinds from the recession that the US is facing. higher energy costs and a substantial monetary tightening”, warned the German Bank report, adding that “we see two risks to growth prospects. There is a ‘double dip’ recession: The euro area appeared to have briefly emerged from recession before contracting in late 2023 on increasing economic headwinds. The second risk is that the euro area suffers a short and not immediate recession, only to fall into a ‘delayed’ recession in late 2023.

“We are underestimating inflation in the Eurozone”

DB economists emphasize inflation as the main concern. Experts from the German bank were among the first to warn of the arrival of an inflationary shock in early 2021. Many labeled their economists as catastrophists. In the end they were proved right.

“Inflation is our main concern in the euro area. It is unlikely core inflation By the time a little more time passes, it clearly reaches its maximum point (peak). Deutsche Bank’s new forecast report warns that inflation risks are to the upside and that market and consensus views on inflation remain very benign.

The document highlights that both the market and the consensus are underestimating the risks to inflation for 2023. Both the market and the consensus expect the harmonized CPI for 2023 to be around 6% year-over-year. However, “we think it is too low (we see 7.1% YoY). We expect 2023 core inflation to be 4.7% year-on-year. In addition, we see higher long-term headline inflation which is reflected in expectations and wage demands. Household surveys have stabilized at levels clearly above target and previous risk bound by hope Inflation needs to be closely monitored.

Economists who signed off on a Deutsche Bank report see salaries rising by 5% through the end of 2022… and likely to remain at that level in 2023. An extremely tight labor market and high inflation expectations suggest that the euro area’s Phillips curve has returned to its pre-sovereign debt crisis position … However, we expect monetary tightening and slowing growth to push unemployment to 7.4 in 2024. %, reducing wage growth to 3% in 2025″, the experts conclude.

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