The vice-president of the European Central Bank, Luis de Guindos, formerly Spain’s minister of economy, industry and competitiveness, asserted that the inflation decline will not be as sharp or as intense as before and that the downturn will persist through the coming months. He suggested that the improvement in price dynamics will be gradual rather than dramatic.
De Guindos also highlighted clear downside risks for the second half of the year, noting that growth is likely to stay very modest, near zero percent. He will present Diario Vasco’s fifteenth edition this Monday at the newspaper’s headquarters in San Sebastián after attending a recent business forum.
According to him, the biggest risk lies in commercial real estate, with price declines appearing in many countries. The latest ECB projections point to slower growth and somewhat higher inflation for the years 2023 and 2024. He described this year’s euro-area growth as quite modest, about 0.7 percent, and warned that the economy could almost stall in the second half of the year.
De Guindos attributed the reasons to the lingering impact of past inflation on household purchasing power and slower global growth, noting that China plays a substantial role in the world economy. He also mentioned that higher oil prices and depreciation of the euro, along with rising unit labor costs, contribute to the inflation outlook. He stressed that while headline inflation will stay high in the near term, most indicators point to a gradual slowdown over the medium term.
He reminded listeners that inflation in Europe was above 10 percent about a year ago, and the most recent indicator had just surpassed 4 percent, illustrating improving but still fragile price dynamics. He described the fundamental economic situation as more stable, yet losing some momentum, with positive underlying trends still present.
Labor market and costs
On employment, de Guindos noted a slowdown in job creation but emphasized that the growth remains visible. He observed that productivity is not rising, showing a modest deceleration, and that unit labor costs are increasing across the euro area, which stands as a major inflation concern. He suggested that tighter margins in 2022 could help absorb some of the uptick in unit costs, potentially mitigating inflationary pressures in a moderate way.
He also forecast that the ongoing firmness of price dynamics will depend on future wage and profit margins and that any sustained improvement in job margins could offset some of the higher unit costs, providing a modest tailwind for inflation. In his view, the path of interest rates will play a crucial role in guiding the inflation target towards the 2 percent mark. He indicated that rates may need to stay at elevated levels for a period to ensure price stability, while acknowledging the high degree of economic uncertainty that remains. He stressed that moving forward, policy will continue to react to the evolving data, rather than follow a fixed script, to support a gradual rebalancing of growth and price stability. These remarks come as part of a broader assessment of the euro-area outlook presented in recent ECB communications. Attribution: ECB briefing report and public remarks from Luis de Guindos.