Euro Area Economic Outlook
The economy expanded a timid 0.1% in seasonally adjusted quarter-on-quarter terms in Q1, following Q4 2022’s 0.1% contraction. Business and consumer sentiment strengthened in the quarter, while inflation declined, which will have supported activity. Moreover, a strong Easter tourism season in the Mediterranean countries lent decisive support to the economy. However, a weaker industrial sector in the currency union weighed on the overall economic performance. Moving to Q2, momentum seemingly remains subdued. The lagged effects of previous rate hikes by the ECB and declining savings and purchasing power will be taking a toll on the economy. That said, the services PMI averaged higher in April-May than in Q1, as did consumer sentiment. On the other hand, the manufacturing PMI fell further into contractionary terrain in May, dragged down by sharper declines in output and new orders.
Euro Area Inflation
Harmonized inflation rose in April, surprising markets on the upside by increasing to 7.0% from March’s 6.9%. Inflation should resume its downward trend ahead, curbed by tighter financing conditions and cooling domestic demand. A wage-price spiral poses an upside risk, as does a less-hawkish-than-expected monetary policy stance should financial turbulence reignite.