Societe Generale economists report that euro area growth nearly stalled in the first quarter of the year, with GDP expanding by just 0.1% quarter-on-quarter, and confidence indicators remaining weak [1]. The economists note that downside risks to growth are increasing, even as headline inflation is expected to climb further [1]. Specifically, headline inflation rose to 3% year-on-year in April, up from 2.6% previously, primarily due to higher energy prices, while core inflation decelerated slightly to 2.2% [1]. Societe Generale forecasts headline inflation peaking at 3.7% in January 2027, with core inflation potentially peaking at around 2.7% somewhat later, and anticipates limited second-round effects on wages [1].
The analysis references three ECB surveys—the Survey of the Access to Finance of Enterprises (SAFE), the Consumer Expectations Survey (CES), and the 1Q Bank Lending Survey (BLS)—which collectively indicate that the ECB must remain vigilant in maintaining anchored inflation expectations while also managing the rising downside risks to growth [1]. Despite these challenges, Societe Generale maintains its expectation for the European Central Bank to implement a rate hike in June and likely another in September, but considers market pricing of three hikes this year to be excessive [1].
The economists also highlight that, based on available data, there is no clear immediate impact from the Iran war on euro area consumption, particularly in France, where real spending on goods excluding energy was up on a year-over-year basis in March [1]. They caution, however, that the path of core inflation could differ from the trends seen in 2021-22 due to the current economic environment [1].
CONCLUSION
Societe Generale sees rising downside risks to euro area growth even as inflation pressures persist, leading them to expect two ECB rate hikes this year rather than the three priced in by markets. The bank emphasizes the need for the ECB to balance inflation expectations with increasing growth risks, suggesting a cautious policy approach ahead.