Two of the leading US investment houses, Goldman Sachs and Morgan Stanley, have slightly different views on Europe regarding the recession, interest rates and inflation.
More specifically, for the European region, Goldman Sachs expects a moderate recession as early as the second half of this year, due to the ongoing significant disruptions in gas supply caused by the war in Ukraine and the slowdown in growth momentum.
Morgan Stanley, for its part, expects a significant recession in the euro area in 2023 at -0.5% annual change and expects the ECB’s forecast to move from its optimistic baseline GDP forecast just last month of 0.9% annualised growth, closer to its downside scenario of -0.9% annualised recession.
On interest rates, Goldman Sachs expects the path to the ECB’s final rate to be with a 75 bp hike in October, followed by 50 bp in December and February and a final 25 bp hike in March for a final rate of 2.75%, although it sees risks shifting towards a higher final rate in the event of more persistent inflationary pressures and stronger spillovers.
Morgan Stanley, on the other hand, expects that the ECB will also hike by 75 bps in October and by 50 bps in December, in order to reach a level that many in the Council could see as close to the neutral rate, i.e. 2%, by the end of 2022. Thereafter, the pace of increases would slow in her view, with the ECB ending the hiking cycle in March 2023 at 2.5%.”
For inflation, Goldman Sachs estimates that it will peak at around 11.5% in January 2023, before easing to around 4.5% in December 2023. Tensions in the European gas market also remain high, with Russia indefinitely suspending gas flows through the Nord Stream gas pipeline, turning the risk towards a more severe and prolonged recession in Europe.
Morgan Stanley, on the other hand, explains that although inflation in September surprised to the upside, overall inflation could have already peaked. The ongoing rise in inflation continues to be right at the heart of the ECB debate as imported energy inflation becomes more and more pervasive. September inflation came in at an unprecedented 10.0% year-on-year.
The fact that core inflation accelerated sharply in September, from 4.3% to 4.8% year-on-year, will provide additional support for advocates of dynamic policy action on interest rates. Morgan Stanley notes that in September the ECB significantly revised its inflation expectations for 2022 and 2023 from 6.8% to 8.1% this year and by 2% from 3.5% to 5.5% next year. In 2024 it also increased by 20 bps from 2.1% to 2.3%, recognising that price dynamics are likely to prove more resilient than previously.