Now that disinflation is taking hold, the impact on the real economy of the current episode of monetary tightening has become the main concern, so much so that one wonders if the ECB has not gone a bit overboard.
Almost all growth drivers are drying up one after the other. Household oversaving has disappeared or has become an illiquid financial asset, while the rising cost of money is reducing the demand for credit, one of the determinants of investment. Nor can we expect a strong boost from abroad: international trade is faltering, particularly affecting European industry, which is highly dependent on exports (the OECD forecasts weak growth in world trade over the next two years).
On top of this, budgetary policies are constrained by the forthcoming reactivation of European fiscal rules and increasing financial burdens. The Spanish economy is holding up better than the rest of Europe, but the magnitude of our budgetary imbalances calls for a consolidation effort.
However, the analyses agree on the important role of the labor market as a containment dike. Employment has continued to grow, preventing an escalation of bank loan defaults and sustaining demand. This explains why household consumption is the main driver of the slight recovery in growth forecast by the OECD for next year. However, the forecast depends on employment continuing to hold up, something that is not guaranteed: if the sectors that are finding it most difficult to adapt to the energy transition or deglobalization are not cutting back on staff, it is because they consider the slowdown to be temporary.
For example, activity in the automotive and other transport equipment branches has fallen by 4% since the pandemic, when employment has been maintained (in the third quarter of the current financial year it was even 1.5% above the level reached in the same period of 2019, according to sales data from large companies). These sectors prefer to retain staff, even by cutting working hours: a behavior that is understandable in a context of demographic decline, as long as expectations of an improvement in turnover in the not too distant future are maintained. In fact, some worrying signs are already appearing in this respect: see the slight fall in employment in France in the last month, the also slight rise in unemployment in Germany and the clear slowdown in enrolment in Spain.
As prices moderate, wages could also regain some purchasing power and stimulate demand. This is not a wage spiral, as feared by central banks, but rather a phenomenon of one-off compensation of purchasing power. In Germany, for example, agreed wages are rising by between 2.5 and 3%, excluding these temporary and unconsolidated compensations. In any case, the November CPI confirms the lower pressure of core inflation (that obtained by discounting the most volatile components of the index), both in the eurozone as a whole and in Spain.
In the short term, we can still expect high core inflation and CPI rallies due to base effects. The ECB will want to check that the path of prices and wages is consistent with its targets, so no tightening is expected before spring. From then on, however, the case for a rate cut will become stronger (but beware that we will not return to the era of almost free money). In the meantime, an inflection in the monetary discourse would be welcome in order to encourage expectations and thus support the resistance cushions, including the labor market.