The European Central Bank faces a murkier economic horizon as it looks toward the coming months. In its latest monthly Economic Bulletin, the bank notes that inflation remains stubbornly high and the governing council is likely to maintain a restrictive stance above its target for an extended period. The most recent data show a slowing in growth, which clouds the outlook for the latter half of the year and beyond.
The July policy meeting signaled a careful approach to tightening, with a 0.50 point rate hike discussed after the possibility of a smaller 0.25 point move. Markets reacted to a mechanism aimed at tamping down risk premiums, as inflation continues to bite. In Spain, the domestic inflation rate reached 10.8 percent in July, the highest in 38 years, while the euro area hovered around 8.6 percent in June. This inflationary pressure weighs on government debt in several euro area countries.
Prices in Spain rose sharply, with food costs contributing a greater share to the shopping basket than the European average. Oil prices surged more than 56 percent over the past year and a half, cereals rose by about 17 percent, dairy and eggs by 16 percent, and meat by roughly 10 percent. A Bank of Spain study attributes much of this to higher prices for raw food materials and their pass-through to consumer prices across the euro area.
The report emphasizes that economic activity in the euro area is slowing, with Russia’s ongoing aggression against Ukraine acting as a drag on growth. In addition to the direct impact of higher inflation, persistent supply constraints and greater uncertainty are weighing on business sentiment. Companies continue to face higher costs and disruptions in supply chains, even as some bottlenecks appear to be easing.
Looking ahead, economic activity in the second and third quarters benefited from a reopening of the service sector, a resilient labor market, and supportive fiscal policy. As travel resumes, consumer spending is expected to help the economy in the second half of the year. Household savings, backed by a robust labor market, has provided a cushion for consumption during the pandemic era.
Fiscal measures have helped moderate the impact of the Ukraine conflict on households most exposed to high energy prices. Still, governments must design temporary, targeted steps to prevent renewed inflationary pressures while keeping fiscal support proportionate to need.
Lower industrial growth
Purchasing Managers Index (PMI) for June showed manufacturing production contracting, dipping below 50 for the first time since mid-2020. That retreat points to weakening activity in manufacturing, driven by sharp supply-chain disruptions, higher commodity costs in the wake of the Ukraine invasion, and rising uncertainty overall.
New orders in manufacturing also fell in June, while supplier lead times indicated some relief, suggesting bottlenecks remained but did not worsen. In contrast, the service sector rebounded in the second quarter of 2022 and is projected to strengthen further into the third quarter, supported by ongoing demand and a services-led recovery.
The European Commission’s Economic Sentiment Indicator (ESI) edged down slightly in June, signaling a slowdown in second-quarter growth. Confidence improved a touch in manufacturing and services, yet weakened in retail and construction. These shifts reflect persistent inflation worries and ongoing supply-chain disruptions, with consumer confidence slipping to levels below those seen at the start of the Covid-19 crisis.