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Economics
Inflation & Prices
EURO-ZONE INFLATION SINKS TO 2-YEAR LOW AS ECONOMY CONTRACTS
* Consumer prices up 2.9% from year ago in October; est. 3.1%
* 3Q GDP fell 0.1% from previous quarter as rate hikes weigh
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UK Latest: Inflation in Shops Falls for Fifth Month in a Row
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By Andrew Langley
October 31, 2023 at 11:00 AM GMT+1
Updated on
October 31, 2023 at 12:57 PM GMT+1
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3:57
Euro-area inflation eased to its lowest level in more than two years as the
bloc’s economy shrank following an unprecedented ramp-up in interest rates.
Consumer prices rose 2.9% in October — down from the previous month’s 4.3% and
better than the 3.1% median estimate in a Bloomberg survey analysts. In a
separate release, Eurostat said third-quarter gross domestic product fell 0.1% —
missing estimates for stagnation.
Expand
Tuesday’s data show that while the European Central Bank’s 10 back-to-back rate
hikes are helping to bring inflation back toward the 2% goal, they’re also
taking a toll on households and firms by sending loan costs sharply higher.
In Germany, chemical giant BASF SE announced earlier in the day that it sees
2023 sales and earnings coming in at the lower end of its guidance, while
shoppers at France’s Carrefour continue trading down to cheaper brands.
The GDP reading stands in stark contrast to the US, which last week reported
bumper growth between July and September, while also managing to bring down
inflation.
The euro stayed 0.4% higher against the dollar before the Federal Reserve’s
policy decision on Wednesday, while German bonds held gains. Ten-year yields
have fallen more than 10 basis points to 2.78% since last week, spurred by
recent reports of softer economic growth and price gains from some of the euro
area’s 20 members.
Europe’s biggest weak spot is also its largest economy, Germany, which revealed
Monday that output shrank by 0.1% in the third quarter. GDP has barely risen for
a year and a recession is now a real possibility.
Still, Italy just dodged such a fate, while France and Spain grew in the three
months through September.
> WHAT BLOOMBERG ECONOMICS SAYS...
>
> “The euro area is shrinking slightly under the weight of higher interest
> rates, slowing external demand and the lingering impacts of the energy price
> shock. But the economy is not yet falling off a cliff. At the same time, the
> latest inflation data show a marked decline in the headline rate and fading
> cost pressure more broadly. This combination is likely to be roughly what the
> ECB wants to see. The chances of another rate hike this year are now very
> low.”
>
> —Jamie Rush and Maeva Cousin, economists. Click hereBloomberg Terminal for
> full REACT
The euro zone had so far avoided any quarterly downturns — despite the upsurge
in prices that was supercharged by Russia’s war in Ukraine. ECB President
Christine Lagarde, who oversaw a pause in rates last week, sees subdued output
for now.
“The economy is likely to remain weak for the rest of this year,” she said in
Athens. “But as inflation falls, further household real incomes recover and the
demand for euro-area exports picks up, the economy should strengthen over the
coming years.”
Despite the deteriorating backdrop, however, Lagarde stressed again that talk of
rate cuts to perk up activity is premature, with officials’ inflation mission
still incomplete. Markets are currently betting the ECB’s deposit rate will
remain at 4% until at least April.
Read More on Europe’s Economy:
ECB Presses Pause After Barrage of Hikes to Tame Inflation
Euro Zone Edges Closer to Recession on Slowing Business Activity
German Economy Shrank in Third Quarter Amid Recession Threat
While elevated borrowing costs should send price gains back to target in 2025, a
measure of core pressures that excludes food and energy is retreating less
rapidly. It moderated to 4.2% in October from 4.5% the previous month.
At the start of this quarter, output remained in a similarly gloomy state, with
private-sector activity suggesting the region’s economy may be succumbing to a
mild recession, surveys of purchasing managers signaled.
Nevertheless, outgoing Bank of Italy Governor Ignazio Visco said the ECB’s
decision to to keep rates high is the right one. Such action strikes the “right
balance between doing too much and not doing enough,” he said Tuesday in Rome.
Suggesting October’s sharp retreat in inflation may not be repeated next month,
Bloomberg Economics’s Nowcast model sees a small uptickBloomberg Terminal to
3.1% in November.
— With assistance by William Wilkes, Joel Rinneby, Barbara Sladkowska, James
Hirai, Alessandra Migliaccio, and Andrej Sokol
(Updates with Nowcast in final paragraph.)
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