Inflation adds to the picture of an improving eurozone economy

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The European Central Bank is widely expected to announce another sharp rise in interest rates tomorrow as it continues its battle against inflation. New data suggests the ECB may be gaining ground in this fight.

Consumer price rises slowed to an annual rate of 8.5 per cent in January, Eurostat’s flash index showed today, down from 9.2 per cent the previous month. This headline figure, the lowest recorded since May, was lower than the 9 per cent expected by economists polled by Reuters, following a significant slowdown in energy inflation. A word of caution, however. These figures do not include data from Germany, which was unavailable at the time of the release due to “technical data processing issues”. Goldman Sachs expects the headline figure to be revised upwards slightly when the German data lands, reports the FT’s financial blog, Alphaville.

The positive news on inflation comes in the week it was confirmed the eurozone economy narrowly avoided falling into a recession in the final quarter of 2022. Data released on Tuesday showed that the eurozone economy grew 0.1 per cent in the final three months of 2022, bringing the region’s overall growth last year to 3.5 per cent. John Leiper of Titan Asset Management called it “quite an achievement”. 

A relatively mild winter, the easing of the energy price shock and generous fiscal support are among the factors that have helped Europe weather the macroeconomic fallout from Russia’s invasion of Ukraine, according to the IMF, which in its latest update forecasts 0.5 per cent growth for the region in 2023. Although lower than the 1.9 per cent growth projected by the Fund in its previous forecast in October, the estimate represents a far more optimistic view than the consensus of a few months ago, when economists and business leaders were warning of a deep recession. 

Meanwhile, as Andrew Whiffin writes in The Lex Newsletter, European banks posted some of their strongest results in 2022 since the financial crisis. While long-term trends may work to favour US retail lenders, European banks are enjoying the benefits of high interest rates, which have boosted net interest margins, and investor confidence bolstered by greater faith in local regulators.

Several considerations, however, will temper European optimism. First, the deceleration in headline inflation belies an unchanged rate of core inflation, which excludes food and energy prices and remains at an all-time high of 5.2 per cent. Widely seen as a better measure of underlying price pressures, persistently high core inflation means the ECB will probably continue to raise borrowing costs aggressively. 

In a similar vein, the strength of eurozone output and employment figures may be encouraging, but such economic news is not always good news, writes chief economics commentator Martin Wolf. “The stronger economies are, the greater the worry of central banks that inflation will not return to a stable 2 per cent,” Wolf points out. “And so the longer policy is likely to stay tight.”

Tight monetary policy is already placing a strain on the housing market, with mortgage demand plummeting at a record pace in January to its lowest level since records began, according to ECB data released on Tuesday. 

Need to know: UK and Europe economy

Only one major economy will enter recession this year, according to the IMF, which honoured the UK with this unfortunate distinction in its most recent forecast, predicting a 0.5 per cent contraction over the course of the year.

Chris Giles, our economics editor, says the easiest way for the UK to raise its growth rate in the short term would be to tackle economic inactivity, as labour force participation has nosedived since the pandemic started.

That is far from the only problem plaguing the UK labour market, however, as was made clear today when hundreds of thousands of civil servants, train drivers and teachers co-ordinated to stage the largest strike action since 2011.

Industry groups and politicians have warned that UK green industries risk being left behind by the US and EU unless Rishi Sunak’s government can come up with an adequate response to the global “subsidy arms race” for green growth.

Meanwhile, the UK has set out plans to regulate the cryptocurrency industry, as it seeks to shore up London’s post-Brexit status as Europe’s leading financial centre.

Need to know: Global economy

In the US, the oil and gas boom continues, with unemployment in the sector falling below 2 per cent in December, down from roughly 6 per cent a year ago. Crude production in the Permian basin hit record highs last year, and the state of New Mexico is now producing more oil than the entire country of Mexico south of the border.

China and India will together account for half of global GDP growth in 2023, according to the IMF, which raised its expectations for growth in Asia’s largest economies to 5.9 per cent and 7 per cent respectively. India will hope to use some of that growth to supercharge investment in infrastructure and productivity, with the government pledging today to increase capital spending by a third in its final budget before next year’s election.

Hong Kong will look forward to a growth rebound this year after a dismal 2022, during which strict Covid restrictions led to its economy shrinking by a more than expected 3.5 per cent.

Lebanon has devalued its currency by 90 per cent, but the pound remains far above its black market rate, a reminder of the depth of the economic crisis facing the country. The Banque du Liban, Lebanon’s central bank, said the devaluation was a step towards unifying the country’s multiple exchange rates, a key requirement to unlock a $3bn loan facility from the IMF.

Need to know: business

The US will no longer supply export licences to companies that supply Chinese telecoms giant Huawei, which security officials believe conducts espionage on behalf of Beijing.

Japan and the Netherlands have also reached an agreement with the US to restrict exports of chip manufacturing tools to China, as the White House continues its efforts to hamper China’s ability to produce the semiconductors required for certain advanced weapons.

With the chip industry facing increasing headwinds, Intel is slashing the pay of its managers and executives as part of its drive to shave $3bn off its operating budget by the end of the year.

Shares in Darktrace have fallen significantly this week, after the UK cyber group was accused of irregular accounting practices by short-seller Quintessential Capital Management.

Dublin-based financial data group Ion Markets suffered a cyber attack on Tuesday, which affected derivatives that trade on exchanges. Cyber risk, business columnist Helen Thomas argues, is an increasingly costly and lamentably underinsured danger facing companies across the corporate world.

The World of Work

The US National Labor Relations Board has found that Apple violated labour laws on multiple occasions, after an investigation into complaints of former employees concerning workplace harassment and suppression of labour organising.

UK conference and events provider Etc Venues has been bought by Convene, its US rival, for about £200mn. Convene is betting that remote working will continue to disrupt the city office market, pushing companies to seek convenient central meeting areas to bring together their staff.

Wonder how to get the most out of the introverts on your team? Isabel Berwick, host of the FT’s Working It podcast, speaks to self-described introverts Morra Aarons-Mele and Kesewa Hennessy to find out what we can learn from quiet voices in a loud world.

Some good news

Researchers at the University of California San Diego have developed a new injectable biomaterial with potential benefits for the treatment of heart attacks and traumatic brain injuries. The treatment has been shown to reduce inflammation and promote tissue repair in rodent trials, and could be ready to test on human subjects within one or two years, according to the researchers.