Euro zone inflation spike seen short-lived, under ECB target for years: Reuters poll

FILE PHOTO: Workers maintain the huge Euro logo in front headquarters of ECB in Frankfurt

BENGALURU (Reuters) – A pick-up in euro zone inflation is unlikely to be sustained and slow recovery from a pandemic-induced recession will keep price growth under the European Central Bank’s target for years, a Reuters poll found.

Renewed lockdowns in the currency area continue to hammer the economy, which is in a double-dip recession, and the March 1-5 poll of about 80 economists showed after a rebound next quarter, growth momentum would slow over the next two years.

What has also complicated matters for policymakers has been the rapid rise in bond yields in recent weeks which could dampen economic activity further.

While the poll consensus showed average inflation rising close to the central bank’s target of just under 2% later this year, over 85% – or 31 of 36 economists – said that price growth was not sustainable and would remain under target for years, echoing ECB officials’ comments.

The poll showed inflation would rise gradually to 1.9% on an annual basis in the fourth quarter, but average just 1.4% for the full year and slow next year to 1.2%. Prices rose by 0.9% in February compared to a year earlier, according to a flash estimate.

“A confluence of factors has contributed to the steepening of the inflation curve, but the million dollar question is whether these factors are fundamental enough to mark this as ‘sustainable’,” said Jan Lambregts, head of global economics and markets research at Rabobank.

“There are clearly arguments supporting the reflation narrative, but some key pieces of the inflation puzzle –primarily wage growth – are still missing. Recent price pressures remain of the cost-push variant, which are less durable…or could even be long-term disinflationary in the worst case.”

Graphic: Reuters Poll – euro zone economy and ECB outlook – https://fingfx.thomsonreuters.com/gfx/polling/qzjvqgrnjvx/Reuters%20Poll-%20Euro%20zone%20long-term%20outlook%20-%20March%202021.PNG

Twenty-two of 33 economists in response to another question said the recent rise in yields was an unwarranted tightening of financial conditions which should be fought by the ECB.

“The ECB leadership is not comfortable with the rise in nominal yields, particularly as it comes at such an early stage of the recovery,” Nomura economists noted.

“Our conclusion is that the ECB will not tolerate a rise in nominal yields in the coming weeks – at least not until it is warranted by stronger underlying price pressures, a relaxation of COVID-19 restrictions and upside surprises in growth.”

With the pandemic still raging the top risk for the economy over the coming year was a surge in coronavirus cases and a slow rollout of vaccines, according to 23 of 34 economists who answered a separate question.

After shrinking 0.6% in the fourth quarter of 2020, the euro zone economy was forecast to contract 0.8% this quarter and grow 2.1% next, unchanged from last month. It was then expected to expand 2.2% and 1.3% in the third and fourth quarters, respectively, compared to 1.9% and 1.2% previously.

The economy was expected to grow an average 4.3% this year and 4.2% next, compared to 4.3% and 4.0% predicted in February.

Over 60%, or 22 of 35 economists in response to another question said euro zone gross domestic product (GDP) would take more than a year to return to pre-COVID-19 levels, citing stalled economic activity and rising unemployment.

“Demand remains key. Even though government support may have averted a much more severe decline in consumer spending, pent-up demand will only provide a temporary impulse after the economy reopens,” said Rabobank’s Lambregts.

“Of graver concern is whether people who have withdrawn from the labour market altogether will be able to return soon after COVID-19 restrictions are lifted. At the very least full normalization of the labour market should not be expected before mid-2022, in line with our GDP forecasts.”

(Reporting by Shrutee Sarkar; Polling by Indradip Ghosh and Hari Kishan; Editing by Rahul Karunakar and Emelia Sithole-Matarise)

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