Global Daily – Euro core inflation could disappoint

by: Nick Kounis , Aline Schuiling

Euro Macro I: Core inflation likely subdued in January – The flash estimate of eurozone inflation for January will be published tomorrow. We expect – like the consensus – a drop to 1.2% from 1.4% in December, on the back of lower energy inflation. Meanwhile, we think core inflation will most likely be stable at 0.9% against the consensus for a rise to 1%. This seems to be supported by early data with German HICP inflation (1.4% from 1.6%) and Belgian CPI inflation (1.7% from 2.1%) both dropping. There is limited information about what drove the fall. However, details from the German states suggest that there was some downward pressure from energy inflation, but also signal that core inflation may have declined. This emphasizes that there are downside risks to the consensus estimate for the flash estimate of eurozone core inflation. Looking further forward, we think headline inflation will temporarily accelerate on the back of higher energy inflation. However, we expect core inflation to remain subdued in the coming months despite strong economic growth (see below). This reflects that there is still plenty of slack in eurozone labour markets. In particular, the unemployment rate is still above the low of the last cyclical upswing. In addition, there is likely more slack than the unemployment rate suggests because of the high level of involuntary part-time employment. (Nick Kounis)

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Euro Macro II: GDP growth slower in Q4, upward revision likely – The preliminary flash estimate for GDP growth in 2017Q4 came in at 0.6% qoq, down from 0.7% in Q3. Although this was below our expectations of a pick-up in growth, we still think that the eurozone economy gathered some momentum around the turn of the year. Indeed, we expect the preliminary flash estimate to be revised higher, as has been the case throughout the past four quarters. During the period 2016Q4-2017Q3, the final outcome of quarterly GDP growth has been 0.5 pps higher in total (around 2% annually) than the preliminary flash estimated. This might be due to the lack of growth data for the countries that currently outperform the eurozone aggregate by a wide margin, such as the five small Eastern European member states and Ireland at the time of the publication of the flash estimate. Having said that the Economic Sentiment Indicator that was published today as well, was in line with GDP growth having picked-up in the final months of 2017-first months of 2018. It edged slightly lower in January (to 114.7, from 115.2 in December), but remained higher than the previous peak-levels seen at the end of the year 2000. (Aline Schuiling)