Nomura economists argue that the latest energy price surge will be a larger drag on Euro area growth than a persistent inflation shock. They stress weaker labour markets in Northern Europe, limited fiscal space, more spare capacity and slowing wage growth. These factors should dampen medium-term inflation, even as near-term price pressures and risks around expectations remain under close scrutiny.

Growth hit outweighs lasting inflation risk

"This time around that more widespread supply disruption does not exist, and while energy prices are elevated, they are less so than in 2022 (when oil prices remained above $100 almost consistently from the end of February to the end of July 2022, and when European gas prices in particular peaked at some €340MWh versus their more recent peak of just over €60MWh)."

"For example, the IMF in its latest semi-annual forecasts published just last week estimates that the output gap in the euro area in 2026 will be around -0.2% of potential GDP, versus +0.8% in 2022."

"Central banks’ decisions to tighten policy to address the previous inflation issue are having the desired effect, with inflation across Europe having been on a slowing trajectory ahead of the US/Iran war."

"For sure, there are still pockets of strength in European inflation, notably some residual stickiness in services inflation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)