Germany’s Recession Is Already Forgotten as ECB Hawks Circle

(Bloomberg) — News of Germany’s first recession since the start of the pandemic is barely registering in Frankfurt, where European Central Bank officials remain focused on a possible string of further interest-rate increases.

(Bloomberg) — News of Germany’s first recession since the start of the pandemic is barely registering in Frankfurt, where European Central Bank officials remain focused on a possible string of further interest-rate increases.

The surprise 0.3% drop in gross domestic product that the region’s biggest economy suffered during the first three months of 2023 — a second straight quarterly retreat — is already too far in the past to distract policymakers from their inflation-fighting task.

As they struggle to bring consumer-price gains back under control, ECB officials have already signaled they’re prepared to keep hiking even if the US Federal Reserve pauses. 

Initial remarks in the hours after Thursday’s revised German data showed no sign of wavering in that mission — suggesting any fallout from the report is likely to be limited to the political sphere for now.

“In order to banish the specter of inflation, we in the Eurosystem have acted resolutely,” Bundesbank President Joachim Nagel told an audience in Obbuergen, Switzerland. “The ECB Governing Council will continue on this monetary-tightening path to overcome high inflation.”

Nagel is among hawks touting the prospect of as many as three more rate hikes, while Dutch central bank chief Klaas Knot said once the peak is reached, borrowing costs will be held at that level for a “significant” period of time.

Even dovish Portuguese central bank head Mario Centeno conceded that “monetary tightening will be with us for quite some time — it will not go away as fast as all of us would like.”

Many say taming the spike in prices that followed Russia’s invasion of Ukraine is key to getting expansion in the 20-nation euro-zone economy back on track.

Investors, too, were unmoved by Germany’s disappointing figures, maintaining longstanding bets on two more quarter-point rate moves this year.

“Surprising weakness in the euro zone’s biggest economy at the start of the year is a reminder that growth is fragile, even before tighter monetary policy passes through in full,” said Jamie Rush, chief European economist at Bloomberg Economics.

“For the ECB, though, the focus remains on underlying inflation. Our forecasts show core inflation accelerating into the summer, keeping the ECB hiking at least until July,” he said.

No analyst surveyed by Bloomberg predicted a GDP drop as large as Germany announced — the culmination of a string of downbeat economic reports.

Pressure on consumers has been building — prompting them cut back on goods from food to cars. Manufacturing has also worsened. The Ifo institute’s survey of companies showed that the business outlook deteriorated this month for the first time since October, while purchasing managers reported a significant drop in factory activity. 

The DIHK business lobby, which conducted its own survey of members, said Monday that there’s scant evidence of a pickup taking hold. It held to a forecast for no increase in GDP this year as a whole. 

Countering such gloom was news from purchasing managers that a robust services sector is continuing to drive growth, while the Bundesbank declared that the economy probably resumed expansion during the current quarter. 

But such reports tend to point to the other pervading risk for Germany, and the euro zone as a whole: that inflation remains undefeated. 

That’s a theme that ECB Vice President Luis de Guindos touched on in comments to the European Parliament on Thursday.

“Our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our 2% medium-term target,” he said in Brussels. Once there, they’ll “be kept at those levels for as long as necessary.”

Even Bank of France Governor Francois Villeroy de Galhau, less of a hawk than many of his colleagues, acknowledges the possibility that rates may need to keep rising through September. 

“We should be at the terminal rate not later than by summer, which starts in June and ends in September,” he said in Paris. “Hence we have three possible Governing Councils either to hike or to pause.”

Villeroy advised colleagues to assess how past rate increases are feeding through, however. It’s the mounting impact of 375 basis points of tightening so far that could yet convince officials to come to a halt. 

“Lagged effects of hikes are going to start to bite,” Iain Stealey, international CIO for fixed income at JPMorgan Asset Management, told Bloomberg Television. “At some point they are going to sit back and say ‘actually — on a forward-looking basis this growth data is going to hurt prices.’”

–With assistance from Ben Priechenfried, Tom Mackenzie, Constantine Courcoulas, Henrique Almeida, Alessandra Migliaccio and Alessandro Speciale.

(Updates with Dutch, Portuguese officials starting in sixth paragraph.)

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