EU economy forecast

The Spring 2022 Economic Forecast was made available on the European Commission's website on May 16.[1]With a cut-off date of April 29, this projection is based on a set of technical assumptions affecting currency rates, interest rates, and commodities prices.

Prior to the commencement of the war, the EU economy was expected to see a protracted and substantial boom.

The Russian invasion of Ukraine elicited a significant although, in most cases, brief market reaction. Markets observed a repricing in global equities and bond markets in early 2022, as they braced for good growth, a transitory surge in inflation, and relatively mild policy tightening. Market volatility surged, credit spreads widened, and equities indexes fell following the commencement of the conflict, which heightened the possibility of greater inflation and poorer growth.

Real GDP growth in the EU is now forecast to be 2.7 percent in 2022 and 2.3 percent in 2023, down from 4.0 percent and 2.8 percent (2.7 percent in the eurozone) in the Winter 2022 interim Forecast, respectively. The reduction for 2022 must be viewed against the backdrop of the economy's spring and summer growth momentum, which adds about 2 percentage points to the annual growth rate for this year. The year-on-year growth rate has been decreased from 2.1 percent to 0.8 percent.

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Image 1: A heightened commodities and energy price shock has increased the risks of higher inflation and poorer growth in the euro region. (Source: ecb.eu)

Since early 2021, inflation has been increasing. It increased from 4.6 percent in the final quarter of 2021 to 6.1 percent in the first quarter of 2022. In April, headline inflation in the euro area reached 7.5 percent, the highest level in the currency union's history.

According to ECB, inflation in the eurozone is expected to reach 6.1 percent in 2022, then drop to 2.7 percent in 2023. In comparison to the Winter 2022 intermediate Forecast, this is a significant higher adjustment for the entire year of 2022. (3.5 percent). Inflation is predicted to reach 6.9% in the second quarter of this year before gradually declining. Inflation in the EU is anticipated to rise from 2.9 percent in 2021 to 6.8 percent in 2022, before dropping to 3.2 percent in 2023. In both the EU and the euro area, average core inflation is expected to exceed 3% in 2022 and 2023.

ECB decision

Robert Holzmann, a member of the European Central Bank's Governing Council, has a clear message: get ready to say goodbye to negative interest rates in the eurozone.

Holzmann told POLITICO: "As inflation has been higher than we had expected a couple of months ago, I think three hikes this year will be possible," said Holzmann, who also heads Austria's central bank. That increase "would allow us to move into 2023 with an already positive deposit rate."

While ECB President Christine Lagarde still considers interest rate hikes in 2022 "extremely doubtful," other officials, including Lagarde, have advocated for a lift-off this summer. Inflation in the eurozone hit a new high of 7.5 percent in April, more than three above the ECB's objective of 2%.

Holzmann also said that these figures indicate that "it's critical to begin hiking as soon as possible," according to Holzmann, a policy hawk. However, he admitted that a majority of policymakers would oppose a rate rise in June. Instead, he suggested, they may decide in June to virtually commit to the first ECB interest rate rise in more than a decade in July.

EURUSD

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Image 2: EURUSD weekly multiyear chart (source: Tradingview)

As it can be seen in Image 2, EURUSD is in the multiyear support zone. When we zoom it in, we can see that the price is bouncing back, and close to downward direction zone. If the price would continue trajectory from the last couple of weeks, it could continue to move upward to resistance zone as we can see it in Image 3.[1]

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Image 3: EURUSD weekly multiyear chart (source: Tradingview)

On any signal or higher probability that ECB could raise interest rate, we could probably see price around resistance zone, and maybe even price around 1.20-1.22 (highs from 2021).[2]

Overview report prepared by Jozo Perić, analyst of CapitalPanda

[1,2] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.

*Past performance is no guarantee of future results.

[1] Forecast: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_3070