Stagflation reigns in the Euro area

by Shaun Richards

This morning has brought rather a torrent of data on the Euro area economy and as we peruse the numbers we see that we were on point with our theme. Let us start with La Belle France where the nearly re-elected President Macron will be grateful these numbers were produced after the election.

In Q1 2022, GDP marked time (0.0% quarter-on-quarter, after +0.8%), linked to weak domestic demand: household consumption fell sharply (–1.3% after +0.6%), while gross fixed capital formation (GFCF) slowed down slightly (+0.2% after +0.3%). All in all, final domestic demand excluding inventories made a negative contribution of –0.6 points to GDP growth (after +0.5 points in the previous quarter). ( Insee)

So the economy ground to a halt with households cutting back sharply in perhaps the first signal of the cost of living crisis hitting home. Also the numbers have been boosted by some stocking up which may be in advance of higher prices or simply at at time of supply-chain problems an attempt to have more of a reserve.

Finally, the contribution of changes in inventories to the change in GDP is once again positive this quarter (+0.4 points after +0.3 points in Q4 2021).

There was also a signal of problems in an area ( nuclear power) which should have been a strength for France but has turned out to have reliability issue.

Conversely, production of “energy, water, waste” fell sharply again this quarter (–2.6% after –1.3%), particularly electricity production.

The next component of stagflation is this.

Year on year, the harmonized consumer price index should increase by 5.4%, after +5.1% in March. Over one month, it should grow by 0.5%, after +1.6% the previous month.

We do not get much detail on this measure but we get more from France’s own domestic measure.

Energy prices should fall back in line with the drop in oil product prices, and those of manufactured products should slow down. Services prices should accelerate, in particular due to a sharp seasonal rebound in the prices of transport services. The rise in food prices should be more sustained than in the previous month.


If we switch from the second-largest to the largest Euro area economy then we get some better growth news.

WIESBADEN – The gross domestic product (GDP) increased by 0.2% in the 1st quarter of 2022 compared to the 4th quarter of 2021 – adjusted for price, seasonal and calendar effects.

But even the German statistics office cannot raise much enthusiasm.

After the recovery of the German economy last summer and the decline at the end of 2021, economic output increased again slightly in the first quarter of 2022

Probably due to this.

Compared to the fourth quarter of 2019, the quarter before the start of the Corona crisis, GDP in the first quarter of 2022 was 0.9% lower (price, seasonally and calendar adjusted).

This means that the German economy has shrunk over the past 6 months and more of that seems to be on the cards.

Since the end of February, the economic effects of the war in Ukraine have had an increasing impact on economic development.


Yesterday we were told this.

Harmonized Index of Consumer Prices, April 2022:
+7.8% on the same month last year (provisional)
+0.7% on the previous month (provisional)

According to the breakdown of the domestic measure then food price inflation has picked up to 8.5%. Oh and you may like to note another of my themes in play as the measure of housing inflation (rent) is at 1.6%.

This morning we learnt that imported inflation is on the march.

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WIESBADEN – Import prices were 31.2% higher in March 2022 compared with March 2021. A higher change on the previous year had last been recorded in September 1974 during the first oil crisis (+32.6% from September 1973)…….. Compared with February 2022, import prices were up by 5.7% in March 2022.


The third-largest economy in the Euro area produced the best quarterly numbers of the major economies.

Spanish GDP registers a 0.3% variation in the first quarter of 2022 compared to the previous quarter in terms of volume.

However if retail sales are any guide things went south in March.

The monthly variation of the seasonally and calendar adjusted general Retail Trade Index (RTI)
at constant prices between the months of March and February, stood at −3.8%. This rate was 4.5 points lower than the previous month…..In March, the General Retail Trade Index, once adjusted for seasonal and calendar effects, registered a variation of −4.2% as compared with the same month of the previous year. This
rate was 5.1 points lower than the one registered in February.

No doubt this is a factor in this reported by

Reality has forced the Government to keep optimism in the drawer and adapt its growth forecasts to an economic context that looks increasingly worrying. After enduring for six months against the opinion of all analysts and international organizations a growth forecast of 7% for 2022, the Government has cut this Friday no less than 4.3% its growth expectation for this year.

After forecasting 0.9% for this quarter I guess the Bank of Spain is keeping a low profile.

Also 4.3% is not what you might think it is.

The Bank of Spain revealed a few weeks ago that even in a context of zero real growth, GDP would grow above 3% in 2022 due to the inertia of the evolution of the economy.

Also the advance GDP data is pretty much pre the downturn.

The advance data for the first quarter published this Friday by the INE is based above all on the employment data -which has been evolving better than the economy for months- and on the information available from January and a little from February, that is, before war.

As to inflation even the better news is bad.

In April, the estimated annual variation rate of the HCPI stood at 8.3%, one point and a half
less than the one registered in the previous month.
For its part, the estimated monthly variation of the HCPI is -0.2%.


We can now switch to the ECB and its monetary policy. This morning’s money supply data shows the scale of the problem facing it.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 8.8% in March from 9.1% in February.

On the one hand it will want to pump that up to try and get growth going again. The catch is that whilst the annual rate of growth has faded it is still very high especially when we remind ourselves it is on top of the previous surge. The M1 money supply is now some 11.5 trillion Euros.

On the other hand it needs to reduce the money supply growth to reduce inflation. I have regularly pointed out that broad money growth tends to flow into nominal GDP growth. As real growth is flatlining at best then this is the best forecast for the inflation rate looking ahead.

The annual growth rate of the broad monetary aggregate M3 stood at 6.3% in March 2022, after 6.4% in February, averaging 6.4% in the three months up to March.

So there is little or no respite in site and the explanations of President Lagarde only end up giving people the hump.

Meanwhile did anybody mention stagflation?

In the first quarter 2022, seasonally adjusted GDP increased by 0.2% in the euro area and by 0.4% in the EU,
compared with the previous quarter……Euro area annual inflation is expected to be 7.5% in April 2022, up from 7.4% in March according to a flash estimate from Eurostat, the statistical office of the European Union.


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