Surveys question depth of recession
- In the euro area, we had a bunch of survey data most notably the PMIs, which showed a strong recovery for February, especially from the services sector. Delivery times continued to shorten, especially in Germany. German GDP revisions supported the narrative that domestic demand was weak in Q4 2022, despite surveys showing an uptick at this time.
- In the UK, surveys have also been a dominant theme this week, with the PMIs rising and there being some modest easing in price pressures – though not enough yet to be convinced that inflation will ultimately head back to target on a sustainable basis.
- A similar pattern could be seen in the GfK consumer confidence survey (confidence improving and inflation expectations falling but still historically elevated). Elsewhere, better public finance data suggest that the Chancellor might afford a small fiscal support package next month.
Euro area February inflation comes in hot
- The flash print of February euro area inflation came in strong, as we had widely expected. More importantly for the ECB, meanwhile, core inflation printed at 5.6% yo-y, in line with our materially-above consensus call.
- At the country level, we saw above-consensus prints from all of Spain, France, and Germany on the headline number, with a positive monthly excess core reading for each of these countries.
- How will the ECB react to this? While the annual figure rose, it is important to stress that monthly excess core did come in line with our expectations, and showed a material slowing from January. All will depend on whether it slows further, as we expect.
ECB hikes ongoing as inflation expectations fall
- Medium-term consumer inflation expectations fell in the euro area according to the ECB’s January Consumer Expectations Survey. 3Y ahead expectations fell to just 2.5% in January from 3.0% in December.
- Consumers feel slightly less pessimistic on the macro outlook with economic growth expectations ticking up (i.e. for a more modest recession). However, on their personal spending plans households have become more pessimistic, despite stronger labour market expectations potentially stoking the inflation fire.
- Some ECB doves may leap on the negatives in this report to call for smaller rate hikes. However, we believe the ECB still has a long way to go, and that the main policy rate will eventually reach a terminal rate of 4.25%. Moderating inflation expectations on one (albeit important) metric is not a sufficient condition to stop tightening, in our view.