On December 8, Bloomberg published an interview with ECB board member Isabel Schnabel which sets a very hawkish tone for the Governing Council meeting on December 18.
It is not the first time that she gave a hawkish interview shortly before an ECB policy decision, and we will not make the same mistake again by treating this as a single voice without the backing by President Lagarde. The ECB published the interview on its webpage under the title “Steady for longer”. That is likely the message we will get from Ms Lagarde next week. We don’t agree with Ms Schnabel that the economy is already growing above potential, but we have also noticed that economic momentum has improved across the euro area. Given the fiscal impulse and higher minimum wages from January 1, a cyclical recovery is likely coming in Germany, further supporting growth in the rest of the bloc.
Services inflation to moderate further
Ms Schnabel rightly pointed out that services inflation remains far above its pre-pandemic level. Still, services inflation should moderate further as the labour market weakens, leading headline inflation to settle below 2% next year. In the euro area, workers want to be compensated for past inflation and adjust their wage demands only in part based on current labour market conditions. While such backward-looking wage negotiation behaviour could keep upward pressure on services inflation, there are signs that negotiated wages are falling.
The unemployment rate – currently at 6.4% – might not be the best indicator in times of demographic-induced structural labour scarcities. The change in the vacancy rate provides a more accurate picture of current dynamics. It has been declining since mid-2022, giving us another piece of evidence that the labour market is getting weaker.
Downside risks to the ECB’s inflation forecasts
The ECB’s September macro projections show inflation averaging 1.7% in 2026 and 1.9% in 2027. We see downside risks to the inflation forecasts for several reasons. First, the technical assumptions for the projections are based on current financial market values. Since September, energy prices have declined while long-term bond yields have increased. The euro has weakened slightly but in trade weighted terms, it is still stronger than a year ago. Therefore, lagged effects from a stronger euro are still disinflationary.
Moreover, the European Commission is discussing whether to postpone the introduction of the Emissions Trading System 2 (ETS2) which was supposed to contribute 0.2 percentage points to 2027 inflation. Delaying the introduction would most likely imply that inflation remains below 2% for the next two years.
Less hawkish message would be more appropriate
We agree with Ms Schnabel that the economy has been remarkably resilient. We were surprised that GDP was able to grow by 0.3% in Q3. The momentum will continue in the coming quarters as indicated by the purchasing manager indices (PMI). We just would not get too excited. Credit is barely growing in real terms, and the Bank Lending Survey suggests that corporate demand for credit is muted. This simply does not suggest that investment spending by the corporate sector will pick up strongly in the coming months.
To sum up, we are optimistic about economic growth in 2026 but wouldn’t get too excited about it either. As a result, there are few reasons to worry about elevated inflation. A more dovish ECB statement next Thursday – compared to Ms. Schnabel’s recent interview – would be more appropriate.
By Karsten Junius, chief economist at J. Safra Sarasin Sustainable Asset Management
