Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.
Eurozone inflation fell to 2.8% in June, reflecting a dichotomy at the heart of the European economy. On the one hand, the conflict in the Middle East has led to energy supply disruptions and periods of higher crude oil prices, increasing fuel, transport and production costs that eventually feed into consumer prices.
But on the other hand, economic activity remains weak. With businesses cautious about investment and consumer demand subdued, overall spending in the economy remains low. Put simply, the Eurozone economy is not generating enough momentum to drive prices higher at any great pace.
Added to this, wage growth has hovered around 3% over the past year and energy markets are showing signs of stabilising. The recent ceasefire agreed between the US and Iran has opened up the prospect of a lasting reduction in regional tensions, reducing the risk of renewed upheavals to global oil and gas supplies. If maintained, lower energy costs will gradually feed through to transport, manufacturing, and distribution sectors in the coming months, easing cost pressures for businesses.
Rising inflation prompted the European Central Bank to raise interest rates in June, but policymakers know that there is no need to panic.
We may see one further hike this year – taking interest rates up to 2.5% – but we are unlikely to see more drastic action taken. With the economy weak and inflation appearing manageable, the ECB will be wary of adopting a significantly more restrictive monetary policy stance.
Savvas Klitou, Regional Managing Partner & Head of Tax Services, South East Europe – Region-Specific Commentary
In South East Europe, the peak summer tourism season is expected to provide a temporary uplift to economic activity, particularly in hospitality and related services. The recent reduction in regional tensions has further supported travel sentiment, boosting inbound demand.
Strong inbound demand should support consumption and, in some markets, keep services inflation elevated, especially in accommodation and dining. This is most evident in Greece and Cyprus, where tourism is a key driver and recent GDP growth has outpaced the Eurozone average.
However, this seasonal boost should not mask underlying weaknesses, with investment and industrial output remaining subdued. Overall, while tourism may sustain short-term price pressures, inflation is still expected to broadly follow the Eurozone’s moderating trend.
