The European Central Bank finds itself in a tricky position: of contending not only with surging prices, which might warrant rapid rate rises, but also gloomier growth prospects, which might warrant patience
have played a much bigger role in pushing up consumer-price inflation in Europe than in America, where generous stimulus has also been a culprit. According to Goldman Sachs, a bank, energy prices in the euro area—which rose at an annual rate of a whopping 39% in May—are contributing about four percentage points to headline inflation, compared with two points in America.
One consequence of the energy shock is lower household incomes in real terms. Wage growth has been picking up modestly across the zone, but still trails behind inflation. Some employers have made one-off payments to workers, to compensate them for surging prices without incurring higher recurring wage costs. Even then, however, annual pay growth in the Netherlands, for instance, stood at just 2.8% in May, notwithstanding strong business sentiment and a tight labour market.
Economists are therefore pencilling in slower growth over the rest of the year. But few expect an outright recession just yet. That is because some parts of the economy confront the energy shock from a position of strength, rather than weakness. Many services firms are still reaping the rewards from reopening and the end of Omicron-related lockdowns. Southern countries are benefiting the most, given their reliance on tourism.
A hoard of savings built up during lockdowns should also provide consumers with some cushion against the energy shock. According to our calculations, such “excess” savings in France and Germany amounted to around a tenth of households’ disposable incomes in the first quarter of 2022.
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