Market Economics | Interest Rate Strategy - BNP PARIBAS ...

optimism on Germany, in last week’s Market Mover 3
we revised up our growth forecast to 3.5%, the same
rate of growth as in 2010.
Chart 7: Core HICP – EZ & Germany
With a smaller level of slack in the economy, closing
at a fast rate, and being driven to a greater extent by
domestic demand, this has implications for our
German inflation forecast.
Ironically, Germany has been one of the biggest
contributors to disinflation in the euro area over the
past two years. After a decade gaining
competitiveness relative to other member states,
core CPI was one of the fastest to fall in response to
the recession, hitting 0.2% y/y in April 2010, a full
0.6pp under the euro area’s record low.
However, its status as a disinflationary force in the
euro area is unlikely to last long. From nearly a half a
percentage point under the euro area average in
2010, we expect headline inflation in Germany to rise
above it by early 2012, with the risk it comes earlier.
Source: Reuters EcoWin Pro
Chart 8: EZ Core HICP & Economic Slack
The numbers
In response to the above mentioned factors, we have
revised upwards our profile for inflation in the
eurozone. We now expect headline inflation to
average 2.2% in 2011 (from 1.8% previously) and
1.6% in 2012 (from 1.3%).
Core inflation, meanwhile, is expected to average
0.9% and 1.1% (from 0.7% and 0.5%) in 2011 and
2012 respectively. While we expect indirect passthrough
from the soft commodity shock, and have
adjusted our forecast to allow for stronger inflation in
Germany – we see core inflationary pressures
remaining contained.
Source: Reuters EcoWin Pro
Chart 9: Core HICP – Periphery vs. Core
First, we are sceptical that we will see significant
second round effects across the eurozone as a
whole in the current environment of high
unemployment and fiscal austerity. More generally,
slack in the euro area economy should continue to
limit core inflationary pressure.
Second, we continue to expect disinflationary
pressure will resume from Ireland, Spain, Portugal
and Greece – economies where disinflation is part of
a structural adjustment to regain competitiveness.
This process was interrupted in 2010 as most of
these countries raised indirect taxes. But in 2011 we
expect that trend to resume – indeed there is already
evidence of that starting to happen in Greece.
Source: Reuters EcoWin Pro
3 “Germany: Stronger for Longer”, Market Mover, 13
January 2011
Eoin O’Callaghan 20 January 2011
Market Mover
17
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