Euro Area Economic Outlook
The economy continued to expand in quarter-on-quarter terms in Q4, albeit timidly, surprising markets on the upside. Incoming data for Q1 gives room for hope that the economy could dodge a contraction in the current quarter. In January, inflation continued to decline, and economic sentiment improved. Moreover, the composite PMI moved further into expansionary terrain in February, and consumer sentiment hit a one-year high amid falling energy prices. That said, the lagged effects of cumulative interest rate hikes on borrowing activity seem to have started to bite. On the international front, in February, the EU announced a new round of sanctions on Russian exports, while it also proposed loosening controls on state subsidies to counter the U.S. Inflation Reduction Act. Meanwhile, the EU carbon price recently exceeded EUR 100, which could hurt businesses and investment.
Euro Area Inflation
Harmonized inflation fell to 8.6% in January from 9.2% in December, mainly due to a softer increase in energy prices. Inflation should decline this year amid cooling domestic demand, tighter financing conditions and lower energy prices. Second-round effects pose an upside risk, while a stronger-than-expected euro poses a downside risk.