The slowdown that the ECB did not see coming. The unheeded alarm of Visco and Panetta

After the inflation, the technical recession. Another cold shower arrives for the economists of the European Central Bank (ECB). Just a few days ago it was Isabel Schnabel, a German member of the Frankfurt Board, who provided the latest estimates. “At the moment we do not expect a recession in the euro area,” she told the newspaper De Tijd in an interview conducted on May 31. She wasn’t the only one.

Estimates have become more difficult to produce. Frankfurt’s economists know this. Before Schnabel, Vice President Luis de Guindos spoke in an interview with The Only 24 Hours of 14 March: «The euro area managed to avoid a technical recession». This was not the case, as he had hypothesized on June 2nd Le Monde, the Italian member of the Board, Fabio Panetta. Who had really spoken of a technical recession. Nonetheless, rate hikes will continue. And the risk of a loss of credibility of the ECB increases in turn.

Uncertainty is high, navigation by sight. President Christine Lagarde has repeated this several times. After months of repeating that the eurozone would not experience a recession, it did. It must be said that the ECB’s policymakers were not the only ones who did not see it. Even the International Monetary Fund, which uses a macroeconomic model similar to that of Frankfurt, had not been able to identify the trend at the end of April. The same dynamics for the European Commission, which has announced that it will update the estimates in August. The trend has not been seen by the private sector either. Carsten Brzeski, head of macroeconomic research at ING, reassured institutional investors at the end of April by noting that the eurozone was out of quicksand. He was echoed by Goldman Sachs, as well as Citi, Société Générale and Deutsche Bank.

However, three central bankers in particular had signaled a possible slowdown following the monetary tightening: the governor of the Bank of Italy Ignazio Visco, Panetta and the Portuguese Mário Centeno. In retrospect, Panetta’s response to Le Monde. “We cannot rule out the possibility that domestic demand continues to be weak and that this translates into prolonged weakness in economic activity or even a technical recession,” he said.

Downside risks, given the continued deterioration of credit conditions, are increasing. According to the ECB’s most up-to-date databases, supply and demand for loans, financing and mortgages continued to deteriorate in the second quarter. With summer on the way, eyes are on the services sector, which is seeing more persistent flare-ups. If they remain high, ING analysts point out, the recession could consolidate on the wave of falling consumption. A phenomenon that could force the ECB to pause for reflection on increases starting next autumn.