The ECB’s fight against rising prices has reduced the size of the euro zone economy

Inflation in the euro area in annual terms slowed to 2.9% in October after 4.3% in September, according to Eurostat data. This is the lowest since July 2021, and this figure largely explains the recent decision of the European Central Bank (ECB) to keep key interest rates at September levels. The long-term effects of the regulator’s tight monetary policy were reflected in the dynamics of the eurozone’s GDP: after two quarters of subdued growth, the figure decreased by 0.1% in the third.

According to Eurostat, in October, inflation in the euro area slowed to its lowest level since July 2021, 2.9%, after 4.3% in September. The slowdown in inflation is a consequence of the ECB’s tight monetary policy. It was also the reason for the regulator’s refusal to raise rates at a recent meeting (see Kommersant on October 27). Note that the October decrease in inflation is not explained by the high base effect – from August to December 2022, inflation was consistently 9–10%.

As follows from Eurostat data, the most significant contribution to the slowdown in inflation in October was made by the decline in energy prices: year-on-year they fell by 11.1% (4.6% a month earlier). Price growth excluding food and energy slowed to 4.2% in October (this is the minimum since July 2022) after 4.5% in September. Note that over the next two years, the ECB does not expect the indicator to return to the target value of 2%: the regulator predicts that by the end of 2023, inflation will be 5.6%, and in 2024 – 3.2%.

Some of the ECB’s concerns are related to the development of the conflict in the Middle East. According to World Bank forecasts, in the event of a major disruption in supplies from the region, oil prices could rise to $150 per barrel (see Kommersant, October 31). Let us recall that so far the Hamas attack on Israel has not significantly affected oil flows, and a serious increase in energy prices is expected only if Iran is drawn into the war.

An attempt to reach the inflation target cost the euro zone economy a contraction of 0.1% in the third quarter, according to Eurostat data. In annual terms, the figure, according to preliminary estimates, increased by 0.1%. Let us recall that in April-June economic growth was 0.2% quarter-on-quarter and 0.5% year-on-year. The EU economy in July-September increased by 0.1% in both quarterly and annual terms. Given the dynamics, the ECB’s September forecast for euro area GDP growth of 0.7% in 2023 looks somewhat optimistic.

Leading indicators of GDP dynamics so far indicate that the economy will remain weak in the fourth quarter. According to preliminary estimates from HCOB and S&P Global, the composite PMI index, contrary to analysts’ expectations, fell to a three-year low of 46.5 points in October from 47.2 points in September. Let us remind you that an indicator value above 50 points indicates an increase in business activity, below – a decline. Due to the decline in new orders, the manufacturing PMI fell to 43 points from 43.4 points a month earlier. The decline in the services sector also accelerated in October: the PMI was 47.8 points after 48.7 points in September.

Taken together, data on inflation and business activity indicate that the ECB will not raise rates in the coming months. However, they are not expected to decrease quickly either: for now, from individual statements by ECB representatives, it follows that it will begin to soften policy no earlier than mid-2024.

Kristina Borovikova