Archive

EA Resilience Is Perfunctory Problem

• Crashing US surveys in 2025 have looked idiosyncratic, as spurious exaggeration of exceptionalism ends. The ESI corroborates the PMI’s resilience in the euro area.
• Price expectations have been trending further above long-run averages without a one-off shock, suggesting European policy is too loose for this stage of the economic cycle.
• EA unemployment remains lower than a year ago, inconsistent with tight monetary conditions. We still see the ECB’s last cut in June, much sooner than the market prices.

By Philip Rush

ECB Meeting Accounts - January 2025

• The ECB emphasised a cautious and data-dependent approach in the account of its January rate cut decision. Market expectations were noted to price in a slower rate-cutting cycle, with the end-2025 rate projected at 2.08%.
• While inflation continues to decline, services inflation remains elevated due to persistent wage growth. The ECB expects wage pressures to moderate, but upside risks, including geopolitical uncertainty and trade disruptions, could delay further easing.
• Some Governing Council members noted that rates are approaching neutral territory, suggesting limited room for additional cuts. The ECB will assess future moves each meeting, with flexibility to slow or accelerate easing.

Euro Area Wage Growth Is Too Hot

• Negotiated wages grew by 4.1% in Q4, slowing sharply from Q3, but little changed on the average from 2024 and 2023. It is not yet on an obvious path of improvement.
• Broader labour costs have also slowed and are suggesting unit labour cost growth of around 4% y-o-y, although that would mark an abrupt rise in the quarterly pace.
• Labour costs are growing too fast to be consistent with a sustainable return to the ECB’s inflation target. We expect its easing cycle to end in H1, much earlier than priced.

By Philip Rush

EA Inflation Excess Persists In 2025

• The final Euro area inflation print for January confirmed the headline rise to 2.52%, 0.1pp above flash forecasts and 0.4pp above the consensus prevailing in December.
• Median inflation rates were at least more subdued than in the UK, but our persistence-weighted and latent trend estimates remain awkwardly high amid rapid wage growth.
• Inflation should slow with French energy prices in February. Unfortunately, it seems set to stick above the target in 2025, discouraging ECB cuts from matching market pricing.

By Philip Rush