European economic outlook - Q3 2023
Consumption: Despite robust wage growth, high consumer price inflation and higher interest rates will mean negligible growth in real disposable income and weigh on private consumption. Higher interest rates will affect demand for durable goods and further strain household budgets as indebted families see their mortgage payments rise. In addition, falling house prices have a negative wealth effect, further weakening private consumption. All in all, we believe consumption will remain stagnant.
Labour Market: Labour markets remain tight, with unemployment rates close to historic lows and robust wage growth. There are positive signs in Spain and Greece, where unemployment has fallen steadily over the past two years and is at its lowest level since the European debt crisis of 2012.
Interest Rates: Following in the footsteps of other DM central banks, the ECB has been relentless in raising interest rates. This, together with falling international energy and food prices and a normalisation of global supply chains, has helped to bring inflation down from its peak of 10.6% in October last year to 5.5% in June. We believe that the context of weak domestic demand will help the ECB to further reduce inflation without having to raise interest rates as much as in the Federal Reserve or the Bank of England.
Inflation: We see disinflation on the horizon. We expect inflation to continue to fall over the coming months and end the year around 3.5%. Our optimism is based on the fact that international energy and food prices have fallen significantly over the past year and that they feed through to the CPI with a lag of 6-9 months.
On Wednesday 26 July, join our Chief Economist and Chief Investment Officer as they discuss the current economic landscape, both here in the UK and globally.
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