Beyond the impact of domestic economic variables, euro rates are determined by the energy crisis and political monetary choices. The combination of a new regime of higher energy prices and persistent expansionary fiscal policy could lead to a debt supply shock and persistent inflationary pressures.
- Economic growth is slowing. The slowdown will accelerate in 2023 with the end of the Covid-19 catch-up effect, the impact of higher production costs, and the cumulative effect of monetary tightening. Leading indicators already point to recession in the United Kingdom and Eurozone.
- The key question for investors remains the impact of lower economic activity on inflation. The economy is in a better position in the United States than in Europe, as US inflation is mainly demand-driven, while Eurozone inflation is cost-driven. Indeed, in the Eurozone energy-price inflation, at 41.5%, remained the main driver of headline inflation.
- The price of energy in Europe could remain high and volatile for longer, if Russia pipeline flows do not resume. In recent weeks, gas prices have dropped in a context of high storage levels and mild temperatures. EU gas storage sites are now 95% full, above their five-year average. Even medium-term prices are down, but the outlook for next year remains challenging.
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