Preliminary data released on Thursday shows a sharp increase in eurozone inflation for April. Concurrent GDP figures for the first quarter indicate the regional economy is struggling to grow. The data release coincides with the European Central Bank's monetary policy meeting scheduled for Thursday. Although eurozone inflation moderated during the final two months of 2022, it remains significantly above the ECB's 2% policy target.
Preliminary figures released Thursday show the eurozone economy grew a mere 0.1% in the first quarter, hampered by the Iran war's drag on regional growth and intensifying inflationary pressures. Inflation also moved higher in initial estimates: the eurozone's inflation rate for April surged to 3%, compared to 2.6% year-on-year in March and just 1.9% the previous month. These key economic indicators are published just as the European Central Bank prepares to announce its latest interest rate decision on Thursday. Markets widely expect the Governing Council to hold the benchmark rate steady at 2%, adopting a wait-and-see approach regarding the inflationary pressures stemming from the Iran war, particularly rising fuel prices. Economists fear Europe could be sliding into a stagflation scenario—characterized by sluggish economic growth, rising inflation, and increasing unemployment. The Iran conflict has triggered global energy shortages and price increases, while simultaneously damaging business and consumer confidence. The ongoing blockage of the Strait of Hormuz, a critical global channel for oil and gas transportation, is a major concern for Europe. Amid robust global demand and intensified competition for resources, Europe is being forced to urgently seek supplies of crude oil, natural gas, and jet fuel from regions outside the Middle East. Berenberg economists warned in an analysis last week: "The current global risk landscape is severe. Combined with Trump's tariff policies and China's subsidized export strategy, the ripple effects of the Iran war are severely impacting European economies." The institution noted: "As long as the Strait of Hormuz remains largely closed and general uncertainty weighs on market confidence, the eurozone and UK economies are highly likely to enter a period of stagflation. Even under our baseline scenario, which assumes the most intense phase of the conflict concludes by late April, European economic growth this year will still be slower than last year's." They advised the ECB to keep interest rates unchanged for now. The analysis concluded: "The future economic outlook depends significantly on the direction of ECB policy. We believe inflation risks are now far lower than 2022 levels... However, if the central bank chooses to raise interest rates in response to this temporary inflation spike, the eurozone could face an avoidable minor recession by late 2026 or early 2027, subsequently paying a recovery cost for the policy misstep. We expect the ECB to hold rates steady this year."
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